Washington State Enacts New Mandatory Long-Term Care (LTC) Insurance Law & Payroll Tax: What You Need to Know

Starting on January 1, 2022, W-2 workers living in Washington state will be subject to a new mandatory 0.58% payroll tax, as part of the Long-Term Services and Supports Trust Act. The legislation was signed into law by Washington Gov. Jay Inslee in 2019, to establish a state-run long-term care insurance program for Washington state residents.

What Is the Long-Term Services and Supports Trust Act/WA Cares Fund?

The new program, now called the WA Cares Fund, aims to provide eligible Washington residents with up to $100 per day ($36,500 maximum lifetime benefit, adjusted for inflation) to pay for long-term care services, including professional care at home or nursing facilities, care provided by family members, home-delivered meals, support for dementia, and installation of adaptive equipment (wheelchair ramps, etc.).

All private and public employers with an employee in Washington (except for the federal government and federal tribes) will be required collect the new tax. Benefits will be available, starting on January 1, 2025.

Exemptions & Opting In

Washington employees have the opportunity to obtain an exemption from the payroll tax by having their own long-term care insurance policy in place by a November 1, 2021 deadline.

An exemption-qualifying LTC insurance policy would have to provide equal or better benefits than the WA Cares Fund provides. Having a qualified life insurance policy or annuity that includes supplemental coverage for long-term care expenses also qualifies for an exemption. Long-term care insurance includes group and individual annuities and life insurance policies or riders that provide directly or supplement long-term care insurance. However, long-term care insurance does not include life insurance policies that: (i) Accelerate the death benefit specifically for one or more of the qualifying events of terminal illness, medical conditions requiring extraordinary medical intervention, or permanent institutional confinement; (ii) provide the option of a lump sum payment for those benefits; and (iii) do not condition the benefits or the eligibility for the benefits upon the receipt of long-term care1.

Self-employed people are exempt from the program, but may opt in. To opt in, self-employed individuals must elect coverage by January 1, 2025, or within three years of becoming self-employed for the first time. However, if a self-employed person does not apply for exemption now and later returns to work as a W-2 employee, they will be subject to the 0.58% payroll tax.

For more information on exemptions or opting into the program, please see guidance from the WA Cares Fund rulemaking process.

Why Washington Residents May Want to Opt Out

There are several reasons why workers in Washington state may want to consider opting out of the WA Cares program:

- - - There is no cap on taxable wages. All wages and remuneration, including stock-based compensation, bonuses, paid time off, and severance pay, are subject to the 0.58% tax.
    - Activities of daily living (ADLs) are the primary way in which long-term care insurers determine if one is eligible for long-term care benefits. A few examples are bathing, feeding, and getting dressed. Most insurers will begin paying out policy benefits when the policyholder can no longer perform at least two ADLs. The state-run program is requiring a higher threshold of three before paying out benefits.
    - Workers might be able to obtain a LTC insurance policy with better benefits for less money than the WA Cares Fund offers.
    - According to the American Association for Long-Term Care Insurance, the average monthly premium for a 55-year-old single male is $141 per month, and for a single 55-year-old female, it’s $223 per month. Needless to say, rates rise rapidly with age. The challenge for younger workers is that they will pay into the system over many decades, perhaps contributing more than they will even receive in benefits. That said, younger, highly compensated employees should consider purchasing a LTC insurance policy offering better benefits at a fraction of the cost
    - The state of Washington could raise the 0.58% tax rate in the future. Purchasing a private LTC policy may protect you from potential future state tax rate increases and paying more because of future wage growth.
    - You may be planning to retire before benefits become available.
    - You may want to retire outside of the state of Washington; the WA Cares Fund only covers Washington residents. Having your own LTC insurance policy would ensure you had coverage in every state.

Legal Questions Remain

Controversy persists on whether the WA Cares program is preempted by the Employee Retirement Income Security Act (ERISA), a federal law that establishes rules and standards for insurance plans established or maintained by employers for the purpose of providing medical, surgical, or hospital benefits in the event of sickness, accident disability, death, or unemployment.

The argument centers on whether the program conflicts with ERISA because it applies to the same type of plans that ERISA governs, while not qualifying as exempt from ERISA because participation is not voluntary. Both employers and employees should be aware that parties may bring suit in federal court to invalidate or delay implementation of the law in the future.