Washington State Long Term Care Tax: Your Options
When we discussed What You Need To Know About Washington’s New Long Term Care Tax we mentioned three basic options available to Washington employees: (1) pay the tax*, (2) buy into a group long term care policy, or (3) buy a qualifying policy that will allow you to opt out of the new tax. In this article we examine the pros and cons of each of these options and look in more detail at the types of policy that may qualify for the opt out.
Option 1: Pay the Tax – Possibly Qualify for the Benefit
The default option for Washington employees will be to pay the tax. This will initially be a new 0.58% tax on earnings. To choose this option a Washington employee need do nothing – their payroll department will take care of deducting the tax. We anticipate that the state will provide information via its website as to how covered individuals can make claims in the future. Since the minimum requirement for temporary vesting in the program is 3 years of working (and paying the tax) a minimum of 500 hours per year, the earliest that participants could make a valid claim will be January 1, 2025.
The advantages of choosing option 1 are:
It is the default and requires no further analysis of your situation.
You will become vested in the program over time.
If you are a low wage earner and are never likely to become a high wage earner, you will be entitled to benefits that you otherwise may not be able to afford.
The drawbacks of paying the tax are:
It may not be the best financial decision given your situation, especially if you are a high wage earner or will be a high wage earner in Washington in the future.
If you do not work for at least 500 hours per year in Washington for ten years you will not permanently vest in the program.
If you leave Washington, you will no longer be eligible for program benefits.
The benefits of the program you are being signed up for are not that great – providing up to $100 per day for only one year. The average cost of assisted living with memory care in Washington is around $235 per day. Care in a nursing home could be even more and long term care may be needed for more than a year – possibly much more than a year.
It is unclear whether the tax rate will remain at 0.58%. The program is supposed to remain solvent. If the costs of the program exceed expectations, which is entirely possible given the rate of increase of long-term care costs, either the tax will increase or benefits will be cut.
Especially if you are a high wage earner, the money that will be spent on the tax may be better spent on either option 2 or option 3.
We do not know at exactly what level of wages (now or in the future) it makes sense to contemplate other options but consider that high wage earners ($200,000+ of W2 earnings) have the most to gain by finding a way of opting out of the tax.
Option 2: Buy into a Qualifying Group Policy
Some employers offer long term care as a benefit. This benefit usually requires employees to opt in and pay a premium for the policy. Typically, the premium will be based on an employee’s age band and there may also be an option to continue the coverage when the employee leaves the employer. This type of coverage is often similar to home or auto insurance in that you use it (make a claim) or lose it.
The advantage of choosing option 2 are:
If your employer offers group long term care (and the if the benefit is not subject to an open enrollment period which would prevent coverage before November 1, 2021) then this should be a simple coverage to obtain. It may be as easy as logging onto your employer benefits website and checking the option.
Group plans do not usually require onerous medical disclosures or underwriting, meaning this may be the only viable alternative for someone with pre-existing conditions.
For young employees, the premiums may be quite low.
The drawbacks of group long term care policies are:
They are not available to everyone – you will only have this option if your employer offers a qualifying policy.
The Premium is not fixed. It will likely change yearly as your age increases and can be re-priced by the carrier.
The policy is not guaranteed to be present in the future. An employer may decide to discontinue the benefit, or the insurance company may discontinue offering the product.
People of above-average health may be overpaying. These are often “simple issue” policies with a wide risk pool and a single health classification, so healthier employees are essentially subsidizing less healthy people.
Coverage options are limited. Sometimes there are only a handful of choices for the amount of coverage so it may not be the right amount for your situation.
The cost goes up with age. Older employees may need to pay high premiums to keep their coverage.
The premiums can also change with time and will likely reflect the increasing cost of long term care.
Although employees can generally opt to keep their coverage when they leave their employer (whether by their choice or not) this can be prohibitively expensive.
If you do change employers, there is no guarantee that your new employer will offer a plan so you may end up paying the tax after all.
Option 3: Purchase Qualifying Long Term Care Coverage
Our next article will look in more detail at some of the different types of coverage that may qualify a Washington State resident for opting out of the new tax. They range from directly buying a long-term care policy to purchasing a life insurance linked product with riders for long term care (PLEASE SEE LIFE INSURANCE DISCLAIMERS AT THE END OF THIS ARTICLE). Some of these products are more focused on providing life insurance, with long term care coverage as an added benefit. Some are more focused on building up coverage for long term care with less emphasis on providing a so called “death benefit”. These options share some common pros and cons.
The advantages of choosing option 3 are:
It will allow you to opt out of the tax (as long as the coverage qualifies, and you obtain the opt out in accordance with Washington’s requirements).
It will likely provide long term care benefits that are far superior to the Washington Cares program benefits.
Qualification for benefits it typically much easier, with benefits often being paid based on 2 activities of daily living (ADLs). Qualification for Washington State plan benefits requires assistance with 3 ADLs.
The disadvantages of this option are:
To qualify for this type of coverage an individual will likely have to go through health screening, some of which may be onerous. Some people will not be eligible as a result of specific health conditions and/or family history.
While such policies may offer much better benefits and investment opportunities, the premiums could add up to more than tax would cost.
There is a limited window of opportunity to get coverage in place. Washington state requires individuals to have qualifying coverage before November 1, 2021. There will be an application process for opting out of the tax.
The complexities of these types of policy mean that individuals will likely need to consult a trusted financial advisor to evaluate their options. We recommend speaking with a Washington based CERTIFIED FINANCIAL PLANNER™ professional before taking action.
*Self employed individuals are not subject to the tax, although they may opt in.
References
https://www.wsha.org/articles/new-state-employee-payroll-tax-law-for-long-term-care-benefits/
https://www.payingforseniorcare.com/washington
https://www.coldstream.com/blog/2021/04/26/new-washington-state-long-term-care-act/
LIFE INSURANCE DISCLAIMERS
The main purpose of a permanent life insurance (whole, universal, indexed, or variable universal life) policy is to provide a death benefit. It is not a short-term savings vehicle nor is it ideal for short-term insurance needs. It is designed to be long term in nature and should be purchased only if you have the financial ability to keep it in force for a substantial period of time.Life insurance coverage needs may change if your personal situation changes. For example, if you get married, have a child or get a promotion, you may want to increase your coverage. Make sure that these strategies and products are suitable for your long-term life insurance needs. Also, make sure you are able to continue premium payments, so your policy doesn’t lapse. If you are utilizing a variable life product remember that market fluctuations can have a significant impact on the policy and could trigger a need to add additional premiums to the policy.Keep in mind that taking money from your policy immediately reduces both the cash value and the death benefit payable and can cause the need for more premiums to be paid into the policy in the future. Policy loans are made at interest, which if unpaid will compound over time. Failure to repay loans may cause your policy to lapse. If a lapse occurs, loans may subject to income taxation. Additionally, there may be a 10% federal tax penalty on the lapse if it occurs before age 59½. You should always take care to ensure that your life insurance needs continue to be met over time subsequent to taking cash from your policy.There are fees and charges for variable life insurance coverage, including a cost of insurance based on characteristics of the insured person, such as gender, health and age. There may also be underlying fund charges and expenses, and additional charges for riders that customize a policy to fit your individual needs.All guarantees are subject to the claims-paying ability of the issuing insurer.