New Washington State Long-Term Care Payroll Tax

Federal tax legislation is currently grabbing all the headlines.  However, there is a new Washington State payroll tax proposal that you should be aware of. 

Please read the following, because for many individuals, it may be advisable to evaluate long-term care alternatives within the short timeframe provided.

On February 23, 2021, the Washington State House of Representatives passed new legislation related to a publicly-funded Long-Term Care Benefits Program for employees in Washington State.  The bill is currently in the Senate, but is expected to pass and soon become law.  Here are the highlights of the legislation:

  1. The program will be funded by a 0.58% payroll tax on wages of Washington employees.  Only employees will pay the tax, not employers.  There is no wage cap on the calculation of tax.  For example, an employee making $100,000 per year in wages would pay an additional $580 per year in tax.  The new tax will start January 1, 2022.
  1. In order to claim benefits under the program, the employee must work at least 500 hours per year for either
    1. A total of ten years without interruption of five or more consecutive years; or
    2. Three years within the last six years from the date of application for benefits.

Benefits will become available in 2025 and are only for Washington residents who need assistance with at least three of the following activities: bathing, dressing, eating, personal hygiene, transferring, toileting, ambulation and mobility, and medication assistance.  Lifetime benefits are capped at $36,500.  Residents who move out of Washington for 5 years or longer forfeit their benefits.

  1. Employees who purchase their own private Long-Term Care insurance policy before the effective date of the legislation may apply for an exemption from the new tax.
    1. Exemption applications will be accepted October 1, 2021 – December 31, 2022.
    2. Approved exemptions will take effect on the first day of the quarter immediately following the approval of the exemption.
    3. An employee who obtains an exemption is permanently ineligible for benefits under the program.

For certain employees – especially high-earners in their 40s or 50s – it may make sense to seek an exemption from the tax by obtaining a private Long-Term Care Insurance policy before the effective date of the legislation.  Below is a list of factors favoring private insurance over the public option:

  1. The 0.58% tax on high-wage employees will be disproportionately high compared to the benefits received under the program.
  2. Private insurance is more flexible and generally has higher benefits.
  3. Employees who will retire before paying into the program for enough years won’t be eligible for the public benefits anyway.
  4. Employees who will potentially move out of the state at some point may never receive benefits.

On the other hand, the drawbacks of private insurance are the progressively rising premiums with age and the possibility of losing coverage completely if premiums aren’t paid.  One option to mitigate these factors is to combine life insurance and long-term care insurance under a “hybrid” policy.  Generally, these policies have less steep premium increases; also, some policies will “refund” a portion of any unused Long-Term Care Insurance by rolling it into the life insurance benefit upon death.

There are still open questions as to the timeline of the new legislation.  However, according to the House Bill Report for Substitute House Bill 1323, the “effective date” of the bill is “90 days after adjournment of the session in which the bill is passed”.  The Washington State legislature is scheduled to adjourn on April 25, 2021.  This would mean that – for purposes of seeking an exemption from the tax –  the deadline for obtaining a private Long-Term Care Insurance policy would be July 23, 2021.  The bill would then go into effect on July 24, 2021, which is 90 days after the adjournment.  Depending on your age, level of wage income, and long-term residency plans, you may want to consider obtaining a private Long-Term Care Insurance policy before July 24, 2021 in order to qualify for an exemption from the new payroll tax.

Please let us know if you have any questions.

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