Getting Your Fair Share of Long-Term Care
Earlier this year, Washington State passed the first ever payroll tax to fund long-term care needs for its residents. Effective on January 1st of 2022, Washington state residents will be subject to a 0.58% payroll tax to fund this program, designed to alleviate pressure on the Medicaid system. While this may be a benefit to some residents including those with average incomes and/or with pre-existing health conditions that disqualify them through underwriting for private insurance, there may be better alternatives based on your unique situation. In the spirit of optimism, we want to make sure you understand how this may impact you and highlight potential alternatives that could make sense for you and your family.
As it is currently written, there is only one opportunity to opt-out of the tax by having a long-term care insurance policy in place by November 1, 2021. This means even if you are exempt right now, should you later become a w-2 employee, you would lose the opportunity to opt-out.
What you need to know:
- The tax. Eligible employees will be subject to an initial 0.58% mandatory payroll tax on all w-2 income, uncapped. This includes wages, bonuses, paid time off, severance, stock-based compensation, etc. For every $100,000 of compensation, $580 of additional tax will be required to be paid. Do note, there is also no guarantee that the 0.58% payroll tax will not be increased in the future.
- Eligible Employee. Washington state residents over the age of 18 who receive a w-2 paystub will be subject to the tax.
- Exemptions. Some residents will be exempt from the tax: including those of you who are 1099 employees, part-time workers, self-employed or business owners. Exempt residents may opt-in to the program (if desired) no later than January 1, 2025 or within three years of first becoming self-employed. Those who are currently retired or under the age of 18 are not eligible for benefits and are not subject to the tax.
- The benefit. The Washington State LTC Act provides $100 daily benefit (once vested[1]) up to a lifetime maximum benefit of $36,500, adjusted for inflation. For many people who require this benefit, neither the daily limit nor the lifetime maximum will be enough to cover their needs. According to the 2020 Genworth Cost of Care survey for Washington State, the average cost per month is $11,954 for nursing home care (in a private room), $6,750 for assisted living, and $6,670 for home health care – and the average long-term care claim lasts about 2.5 years.[2] Based on these figures, the capped maximum benefit would pay less than 20% of an average LTC claim. To be eligible to receive the benefits under the Washington LTC program, residents are required to need to assistance with three Activities of Daily Living (ADLs) as opposed to traditional LTC benefits requiring just two. Examples of ADLs include bathing, eating, dressing, transferring, toileting, continence. Cognitive impairment such as memory loss, Alzheimer’s, or dementia will qualify an individual for benefits in both the Washington State program or traditional LTC. Washington’s LTC Act does, also , include medication management, personal hygiene, and body care to its qualification pool.
Who might consider opting out?
- High income earners. If you are a high-income earner you will likely find that a private insurance alternative can provide a much better benefit coupled with fixed premiums irrespective of income.
- Younger employees with high earning potential. Newer employees in the workforce expecting to be a high-income earner could end up ultimately paying more into the tax than the benefit with decades of funding.
- Not sure about maintaining residence in Washington. You will only be eligible for the benefit if you receive care in Washington State. Residents who move out of Washington State for five or more years forfeit their premiums and benefit. Private insurance can offer more flexibility and portability.
- Plan to retire in next few years. The first claim for the benefits to begin is on January 1, 2025. To be eligible for the benefit, employees must have been paying into the system for either 1) three of the last six years, or 2) for a total of ten years with at least five of those years paid without interruption. Employees who plan to retire before then will not be eligible to receive benefits but will still be subject to the tax.
- Self-employed individuals who may not always be self-employed. While self-employed individuals are exempt from the tax currently, if you are considering returning to work for another company and subsequently becoming a w-2 employee, you would then be subject to the tax with no ability to opt out.
Potential options to consider
If you currently have an existing whole life insurance policy, you may be eligible to add a LTC insurance rider to that policy. This approach could be a solution for a younger employee (under the age of 30) that would not otherwise be eligible for a long-term care policy.
Beyond adding a LTC rider to an existing life insurance policy or annuity, employees have additional options including purchasing a traditional LTC policy or a Hybrid/Asset Based LTC policy. We’ve found that the Hybrid/Asset Based policy has been a great option for clients as it provides a level pool of benefit payable for LTC and if not used, provides a death benefit to beneficiaries. It combines the long-term care coverage with life insurance for lifetime protection. The Hybrid/Asset-Based LTC coverage we have recommended have premiums that are guaranteed not to increase and trumps the “use it or lose it” feature of the traditional LTC policy as it provides beneficiaries with a death benefit if benefits are not used for LTC.
What are the next steps?
If you are considering opting out of the Washington State LTC insurance, please reach out to us to evaluate your unique situation and the best options available to you and work to get you connected with experts in the field. Please note, with the deadline quickly approaching this fall, many long-term care insurance providers are requiring paperwork by the middle of July. As always, feel free to pass on to anyone you feel may be interested or benefit from learning more.
Kelli
Footnotes:
[1] To be vested, an employee must have worked for at least 500 hours per year for at least 10 years, with at least five of those years being consecutive. An employee is temporarily vested if they have worked a minimum of 500 hours per year for three years within the last six years (from the date of application of benefits).
[2] Sources: https://www.genworth.com/aging-and-you/finances/cost-of-care.html
DISCLOSURE: THIS ARTICLE HAS BEEN PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSIDERED AS INVESTMENT ADVICE OR AS A RECOMMENDATION. IT HAS BEEN GATHERED FROM SOURCES BELIEVED TO BE RELIABLE, HOWEVER TSCHETTER GROUP CANNOT GUARANTEE THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION. TSCHETTER GROUP DOES NOT OFFER LEGAL OR TAX ADVICE. PLEASE CONTACT YOUR ATTORNEY OR TAX PROFESSIONAL FOR GUIDANCE ON YOUR INDIVIDUAL SITUATION.
