This legal update has been revised from our April 7 publication to reflect the final amendments adopted by the Washington State Legislature prior to final passage and presentment to Governor Inslee for enactment. The most significant legislative change is additional time for employees to opt out of the public program.
Recent changes to Washington State law will require employees to acquire long-term care insurance by November 1, 2021, to avoid additional payroll taxes. This alert summarizes the current state of the law resulting from final amendments adopted by the Washington State Legislature.
In the spring of 2019, Washington State adopted a new uncapped payroll assessment of 0.58 percent tax on employee wages beginning January 1, 2022.1 That new payroll tax was substantially amended via SHB 1323, with numerous amendments adopted in the last few days. The final bill is expected to be signed by the Governor shortly.
Proceeds of this tax on Washington employees will be used to create the Long Term Care Trust Fund to fund the long-term services and support (LTSS) Trust Program. The LTSS Trust Program is designed to provide basic long-term care insurance for Washingtonians.2 Legislative sponsors, together with the Governor, heralded the new assessment as a “first in the nation” program to help supplement long term care (LTC) expenses and relieve some of the financial pressure on the state’s Medicaid system — though Medicaid costs are still scheduled to cost nearly $4 billion a year by 2030 for long term care expenses of Washingtonians.3
This new payroll tax is expected to cost Washington employees ~$1 billion annually in “premiums”.4 Employers are responsible for collecting the tax via payroll withholding of 0.58 percent and for remitting the premiums to the Washington Employment Security Department. Individuals earning $100,000/year will thus pay $580 per year in additional tax. Employees earning five times as much will pay five times as much premium for the same coverage since there is no cap on wages subject to this tax. (See discussion below regarding an employee’s limited timeframe to opt out of the program.)
Starting in 2025 (after the Trust Fund has built up three years of reserves), the insurance will cover a beneficiary’s long-term care expenses (to the extent not covered by Medicare) up to $100 per day per beneficiary, for up to 365 days, with a lifetime cap of $36,500 (adjusted for WA CPI).5
Benefits must be paid to providers on an approval list maintained by the Department of Social and Health Services.6 Providers eligible for inclusion include:
Eligibility for coverage is different than that found in many private policies: Private LTC policies generally require the insured to be unable to perform two out of six Activities of Daily Living (ADLs).7 In contrast, under the LTSS Trust Program, beneficiaries must be unable to perform a minimum of three out of 10 listed ADLs.8
Current retirees may not qualify for the program, and residents 18 and younger will not be subject to the tax. However, if signed into law as currently proposed, SHB 1323 would make individuals disabled before the age of 18 to be eligible for the LTSS Trust Program.
Under the LTSS Trust Program, individuals would vest (i.e., be entitled to benefits) after they have paid into the program for either:
A minimum of 500 work hours during a year is required for the year to qualify in either scenario.
Thus, a person could temporarily vest under the first test (three of six years) but not permanently vest unless they satisfy the second vesting criteria (10 years with at least five of them consecutive). Strangely, employees who pay Trust Act taxes for fewer than 10 years (e.g., because they retire or become disabled) run the risk of never permanently vesting for Trust Act benefits (though they may be able to qualify under the temporary rules for the first few years of retirement).
Accordingly, those nearing retirement may find that they have paid into a program for which they are not likely to be eligible unless they continue some part-time work (including self-employment) during retirement.
The following persons are not automatically included in the LTSS Trust Program but may opt-in no later than January 1, 2025, or within three years of becoming self-employed for the first time (procedures TBD):
Once made, the opt-in election becomes irrevocable under the SBH 1323. Thus a self-employed person who has elected coverage must continue to pay premiums until retirement or until the person is no longer self-employed, and must notify the relevant administrative agency at such time.
Significantly, for purposes of this article, employees who can “attest” that they have a long-term care insurance policy11 may file for an irrevocable exemption from the tax provided that they have obtained their policies prior to November 1, 2021. Shorter opt-out periods were included in earlier versions of the legislation to intentionally make it harder for people to opt out of the program. The final opt-out date now certain to become Washington law is the result of a compromise between the bill’s proponents and Washington business organizations. Exempt employees, not their employers, are responsible for providing the proper paperwork to their employers to ensure they are not taxed.
We believe that many higher-income employees run the risk of contributing far more to the program than they are likely to receive in benefits, even indexed for inflation. More importantly, they will often find that they can purchase far more comprehensive long term care coverage for less money on the open market. Even if there were no cost savings, better coverage under commercially available policies is critical given that the cost for long term care currently averages between $50,000 and $130,000 per year depending on individual care needs in Washington State.12 Private commercial long term care policies generally offer other benefits not available under the LTSS Trust Program, such as:
Employers are not likely to be able to offer alternatives as group long term care policies are very limited and, in most cases, require health qualification (unlike other commonly available group insurance coverages (disability, health, life). As recently as this week, several insurers have begun to limit the number of employers with whom they are willing to work, especially if the program will be voluntary. Voluntary programs have minimum participation guidelines that must be met in order to offer coverage to the larger group.
The final version of the legislation also requires the Washington employment security department and the department of social and health services to jointly conduct outreach to provide employers with educational materials to ensure employees are aware of the program, and that the premium assessments will begin on January 1, 2022. The law’s outreach and education assistance mandate for state agencies must be completed by October 1 of this year.
Given that an October 1 deadline for governmental education material would only provide employees one month to become educated and consider private LTC alternatives before the end of the Opt-Out period, employers should consider earlier notification if the Washington state departments do not provide their materials by August of this year.
In sum, many middle class seniors are not in a position to fund their assisted living needs, much less their long-term health care if and when it is needed, at least not without impoverishing themselves to qualify for Medicaid. We applaud the creativity of Washington’s elected officials in creating a program that will help seniors address these issues.13 But we do want to ensure that individuals know that they can opt out of the state program by acquiring their own insurance and that such private insurance often will provide them more bang for their buck, especially if they are higher earners. Further, we encourage Washington State employers to consider group plans as part of their suite of benefit offerings for employees, even if they pass on the premium cost to their employees. However, it may prove challenging for employees and employers to obtain policies given the November 1 deadline adopted under the final version of the legislation.
Authors: Lewis Horowitz is the chair of the Tax Group at the law firm Lane Powell, P.C. | Joseph Greenman is a member of Lane Powell’s Long Term Care and Senior Living Team | David Fain is a CFP at Assured Partners specializing in insurance planning.
1 H.B. 1087, Chapter 363, Laws of 2019. Starting January 1, 2024, the premium/tax will adjust biannually to finance the promised benefits but may not increase beyond 0.58 percent without legislative approval. However, the pension funding council must set the premium rate "at the lowest amount necessary" to maintain solvency and there were several changes to the program (such as elimination of a 45-day waiting period and coverage of disabled minors) after the premium rate was set by actuaries — suggesting that higher premiums will be needed to maintain program solvency.
2 Some might question whether one year of coverage justifies use of the phrase “long term” in the appellation of the program.
3 The enabling legislation indicates that Washington State spends $24,000 a year for each Medicaid recipient who needs in-home care and $65,000 a year for nursing home residents. Furthermore, the majority of people over age 65 are expected to need long-term care at some point in their lives. The senior population of Washington doubled between 1990 and 2019 when this law was enacted, and will more than double again by 2040. Some critics of the LTSS Trust Program argue that most of the need is already filled by Medicare, where the cost is shared equally with the federal government.
4 Notably, an advisory question was included on the November 2019 General Election ballot and a majority of voters voted that the program should be repealed — but nothing changed because the vote was merely “advisory.”
5 This benefit is initially fixed and then scheduled to adjust annually by no greater than the WA CPI.
6 Audits are required to ensure that only approved services from registered providers are paid: the Health Care Authority is required to recoup inappropriate payments.
7Those six ADLs are: bathing, dressing, bladder/bowel control, toileting, eating, transferring to/from a bed or chair and walking, with special rules for severe cognitive impairment.
8 The 10 ADLs under the LTSS Trust Program are: medication management, personal hygiene, eating, toileting, transferring, body care, bathing, ambulation/mobility, dressing, and cognitive impairment.
9 Expect a surge of claims on January 1, 2025 (exactly three years into the program).
10 Many employees may find self-employment desirable when they retire from their “regular” jobs since even a small amount of self-employment income (and thus a tiny amount of tax) could be helpful to satisfy the 10-year participation threshold necessary for lifetime eligibility.
11 The Employment Security Department is meeting this week to clarify the definition of LTC insurance. Their definition is important to know what types of policies will be acceptable alternatives to the LTSS Trust Program opt-out attestation.
12 See annual Cost of Care Survey prepared by Genworth here.
13 Washington’s program is creative in yet another way: qualified family members acting as family caregivers are eligible to receive payments from the Trust Program for their services.
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