Understanding Strategies for Long-Term Care Planning Under Washington State's New Payroll Tax

Editorial Note as of June 2023: The Long-Term Care Act payroll tax will take effect on July 1, 2023. If you purchased LTC insurance in time to qualify for the exemption, double-check your pay stubs to ensure you’re not being taxed. Read a more detailed update on the new law here. We will continue to monitor updates to this legislation and will communicate key updates via our newsletter and social channels. Read more about this latest news from the Seattle Times.

More than half of individuals in the U.S. will need some form of long-term care in their lifetimes. When accidents, serious illness, or health conditions leave individuals unable to take care of basic activities of living (ADL), the costs associated with long-term care - sometimes called custodial care - can be overwhelming for some.

In fact, across Washington State, skyrocketing costs associated with long-term care have overburdened the Medicaid system, which funds these services when individuals and families cannot afford them out-of-pocket. Currently, Washington State’s Medicaid program pays for 53% of all costs associated with long-term care within the state.

In order to address a tidal wave of aging Washingtonians who need to access Medicaid funds to cover the rising costs of custodial care, the state has unveiled a new solution in the form of a payroll tax: The Long-Term Service & Support (LTSS) Trust Benefit Program. Here are the highlights:

• Beginning January 1, 2022, there will be a mandated payroll tax on W-2 employees starting at 0.58% of all employment income.
• Washingtonians who qualify are eligible to receive a benefit of $100/day for one year to cover the costs associated with custodial care, as long as they are living in the state at the time of need.
• The state is offering all adult Washington residents a one-time opportunity to opt out of the tax before November 1, 2021. Once you have opted out, you cannot opt back into the program.

To help you understand more about the LTSS program and whether or not it makes sense for you to opt out or pay the tax, our CWM team has been following this issue closely and consulting with our network of trusted professionals to evaluate options and recommend solutions for our clients and colleagues.

Supporting the Rising Tide of Retirees: A State Solution to an Overwhelmed System

Over the last 10 years, Washington’s population has grown by nearly 15% to more than 7.7 million, making it the nation’s seventh-fastest growing state. While some of this growth is attributed to young tech workers and engineers relocating to join the ranks of Amazon, Boeing, Microsoft and others, the population projected to increase the most includes those who have retired — or will soon retire — from the workforce.

The number of Washington residents aged 80 and older is expected to increase by 174% in the next 20 years. With an aging population comes the need for caretakers; however, the population of residents between the age of 45 – 64 (often those providing care for the older generation) is projected to grow by only 14%.¹

The gap between these two groups indicates an imminent shortage of custodial care providers. Until this point, the state’s Medicaid system has funded long-term care for more than half of Washington’s qualifying residents. This large number is partially a result of the Affordable Care Act (ACA)’s individual mandate, which imposed a penalty on those who did not enroll in government-funded or private health insurance coverage. While the ACA legislation provided access to millions who were previously uninsured, it also placed strain on Washington State’s existing Medicaid system.

Now, with 7 in 10 of Americans requiring custodial care services as we age—and at an average cost of nearly $75,000 annually (see below) — the state’s Medicaid funds are quickly depleting.

Exploring the Details of Washington’s Long-Term Service & Supports (LTSS) Trust Benefit Program

The wording of the LTSS legislation, as written, leaves a number of unanswered questions. However, it is clear that the legislation provides basic guidance to install the program and gives the LTSS Trust Commission authority to define eligibility standards, payment limitations and minimum qualifications, as well as the authority to recommend to the legislature proposed tax rates to ensure program solvency.

What will be taxed?

• This group does not include non-W2 business owners or self-employed individuals who do not specifically opt-in, as well as tribal employees and federal employees.

What will the LTSS Trust benefits provide?

• Each Washington resident who pays into the program (see benefit criteria below) is entitled to a benefit of up to $100 per day, or a $36,500 total lifetime benefit, to fund custodial care provided by a private nursing home, assisted living facility, home health care service or hospice center in Washington state that accepts Medicaid dollars.

When looking at the benefits provided by the new LTSS program, it’s important to note that the total estimated lifetime benefit needed is closer to $172,000, making the LTSS benefit only a fraction of the savings that will likely be required to cover an individual's actual cost of care. Broken down a bit more, the current cost of home care in Seattle is estimated at around $219 per day; assisted living care is around $222 per day; and skilled nursing care ranges from $349 - $393 per day. In addition to daily expenses, once an individual qualifies for long-term benefits, the average length of time “on claim” is between eight and 10.5 years. The reality is that the current LTSS program will not even cover the average expenses for one year of care for the average individual who qualifies to receive benefits.

Who will receive the benefits?

• Individuals who have contributed to the LTSS Trust for at least 10 years with at least five of those years being consecutive; OR
• Worked at least 500 hours in each qualifying contribution year; AND
• Reside in Washington State at the time the benefit is paid out; AND
• Are unable to perform at least three Activities of Daily Living (ADLs), including medication management, personal hygiene, eating, using the toilet, cognitive functioning, transferring, body care, bathing, mobility and dressing.

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Please note: Actuarial projections for this program required a higher tax threshold than 0.58%. There is a high likelihood that the rate and scope of the Long-Term Care Act payroll tax will rise, even expanding beyond W-2 income to capital gains and self-employed 1099 filers as well, as the state commission will propose tax rates every two years to Congress, who has the authority to increase the tax without the input of a public vote. While there are a lot of unknowns, CWM’s current recommendations remain centered on our tenet of mitigating risk to focus on real returns.

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Opting Out of the LTSS Payroll Tax

For Washington State residents, it’s often distressing to hear the news of yet another payroll tax. The good news is that there is a small window of opportunity in which qualifying individuals can opt out.

Individuals may opt out of the LTSS program by purchasing a qualifying life insurance policy or annuity that includes supplemental long-term care coverage by October 31, 2021 and obtaining approval from the Washington Employment and Security Department (ESD) no later than December 31, 2022.

However, any opt-out waivers applied for and approved after January 1, 2022, will not result in a refund for any taxes paid before approval. For this reason, based on what we know today, the CWM team recommends that any individuals who wish to opt-out of the payroll tax apply for qualifying long-term care coverage and state approval as soon as possible. Given that standard insurance providers take six to eight weeks to process applications, October 31 is quickly approaching.

Weighing the Benefits

The question then becomes, who should opt out?

Let’s explore how this plays out in different scenarios. Keep in mind that these represent only a small sampling, and the nuances of each individual situation may be very important in determining what’s right for you.

Janet, 56, is the vice president of marketing at a tech company in Seattle. She has spent most of her career at this company and plans to remain there, as she has a significant amount of stock equity that will soon vest. Janet and her husband are looking forward to escaping Washington’s rain and retiring in Florida in a few years.

Janet discusses her options with her CWM financial planning team, who advise her to opt out of the LTSS payroll tax for three key reasons:

1. Janet earns a high income. At the 0.58% tax rate, she will forfeit $1,305 from her paycheck in the first year alone—not accounting for future salary increases and vested stock equity.
2. Because she is retiring in less than 10 years, if Janet were to pay into the program, she would not qualify to receive benefits.
3. Janet plans to move out of state. Even if she delayed retirement, she couldn’t receive the benefits as a Florida resident.

At 56, Janet realizes that it’s the right time to have a more in-depth conversation around long-term care planning. She already has a life insurance policy with a long-term care rider, a provision that will allow her to receive part of the policy’s death benefit to fund custodial care needs while still alive if needed. The rider is also equivalent to the benefit provided by the state program, allowing her to opt-out and avoid the extra payroll tax. According to her CWM advisor’s projections, however, this coverage alone will not be adequate to cover the care Janet will likely need later in life. In addition to her existing coverage, Janet’s CWM advisor may recommend that she consider purchasing more robust private long-term care coverage.

Katherine, 45, knows she wants to stay in Washington state upon retirement. She earns a high income as a supply chain planner and hasn’t given much thought to long-term care planning. Instead, her main focus is on saving all she can for retirement.

She learns from her CWM advisor that due to her age and good health, it is most cost-effective to purchase a small-term life insurance policy with a long-term care rider, which costs around $50 per month ($600 per year). This policy will provide at least an equivalent benefit to the state policy, along with a tax savings of at least $1,160 annually. 

Meanwhile, John is 40 years old and works in construction. Born and raised in Washington, his entire family lives locally and John has no plans to move out of state in the future. He lives frugally, as he is the primary caretaker for his aging father.

At first glance, John might conclude that it is in his best interest to participate in the LTSS program. His current salary of $65,000 will put his payroll tax (at 0.58%) at around $377 per year— an estimated $233 less than the cost of equivalent private coverage similar to Katherine’s above.

Under our current interpretation of the law — and recognizing that John does not intend to move out-of-state in his lifetime — our analysis tells us that for those who do not expect to earn more than approximately $104,000 annually, it may make more sense to pay into the LTSS program than to purchase private coverage, at least in the short run. However, there are some additional factors John should consider:

1. John anticipates that he will continue to work until the average retirement age of 67, and while he doesn’t expect more than a modest increase in his salary during that time, he learns that even a 2% annual cost of living increase will inflate his salary to $108,772 at the end of 27 years, resulting in a larger dollar value being withheld for LTSS and other taxes.
2. Actuarial information for the LTSS program already suggests that the tax must go up in the future for the program to be sustainable. Even if John’s salary remains a constant at $65,000 over the next 27 years, should the tax increase to 0.92%, for example, the cost of the tax will be equal to the cost of equivalent private coverage, over which John would have control.
3. It will be important for John to remember that the LTSS program will only provide minimal coverage for his long-term care needs and that for most individuals, based on the average length and costs of long-term care, the lifetime benefit of $36,500 will not last more than a year. John’s advisor will therefore still recommend revisiting the subject of long-term care when he reaches 50-55 years of age to look more closely at whether it makes sense for him to purchase more robust private coverage. At that point, the opportunity to opt-out of the LTSS program will have expired, and John will be paying for BOTH private coverage and for the LTSS payroll tax.

At the end of the day, John—in collaboration with his CWM team—must decide whether the unknowns of the LTSS program will, for him, justify the small additional cost of purchasing equivalent private coverage today.

Last, Diego moved to Seattle shortly after graduating college to join a large tech company as a software engineer. As he just joined the workforce, he doesn’t know where he’ll be in 10 years, let alone where he wants to retire.

Diego meets with his CWM advisor and learns that if he opts into the LTSS payroll tax, he will pay $870 per year based on his salary level and the current tax rate, not taking into account any bonuses, salary increases or vested stock equity.

His CWM advisor also tells Diego that at 25, he won’t qualify for a traditional long-term care insurance policy. Alternately, he does have the option to purchase a small life insurance policy with a long-term care rider, which provides equivalent benefit to the state policy.

Diego is young and in good health, and quickly realizes that since he doesn’t know where he’ll retire, and since there’s a more cost-effective equivalent option, he’s better off selecting the private coverage.

Ultimately, there are many variables to consider when deciding whether or not to opt out of the LTSS payroll tax. The uncertainties around the state program and how it will evolve over time, combined with the ever-growing costs of long-term care, make it clear that there is no one-size-fits all solution.

No matter your age, the need to consider retirement planning and long-term care strategies is ever-present. Our team has seen how substantial long-term care costs can disrupt the livelihoods of families. Making strategic financial choices now to plan for the future acts as a gift not only to yourself, but also to the next generation.

If you have questions about the new payroll tax and what is the right decision for you, CWM financial advisors are always here to help. Reach out today for a complimentary phone call to discuss your unique situation.

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If you have not yet heard from your employer about Washington State’s Long-Term Care Act and upcoming payroll tax, now is the time to ask. While some larger employers have proactively started the discussion among their employees, for many others, including those still working to navigate and recover from the effects of COVID-19, this may not even be on their radar, and time is short to review your options. We suggest asking:

1. I was reading about the coming deadlines for the new Washington state long-term care payroll tax. Will our company be offering options, such as a group plan, to consider in place of the state program?
2. If group coverage will be available, when might we expect to review the offering and what is the deadline for participation?
3. If I choose to purchase my own private coverage, to whom should I submit my approval letter?

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¹ Washington State Office of Financial Management, Forecasting and Research Division