Washington's New Long-Term Care Tax
One of the questions we’ve been getting more and more in the last month is about the new Washington Cares payroll tax that will start in January of 2022. Because of this we decided it was a good idea to do a bit of a deep dive to find out what it is, how it works, and what it means for our clients who work in Washington.
How much is the tax and who pays it? Starting in January 2020 workers will have .58% of their paychecks automatically withheld and paid into a trust for the Washington Cares Fund. This tax is paid by the employee and not the employer. Unlike Social Security there is no cap on the amount of income that will be taxed. Also note that this is a payroll tax which means it is only charged on income from wages, not self-employment, investment, or flow through income. There is a provision for self-employed individuals to opt into this trust as well, should they want to. Also note that the tax is on all Washington wages even for those individuals who may work in Washington but live in another state.
What benefit will Washington residents receive from this? Beginning in January of 2025 each person eligible for this benefit will receive Long Term Care assistance up to $36,500 (adjusted for inflation) for their lifetime. This benefit can be used for many long-term care costs, from nursing home payments to in-home care aids, payments to family members for care, or even home modifications. However, no matter how much someone puts in they will only ever receive a lifetime maximum benefit of $36,500.
How far will this benefit go? To provide one reference point, the maximum benefit of $36,500 would cover roughly half of the cost of a skilled nursing facility for one year.
What does this mean for me? Well, that depends on your income and your age.
Let’s take the analysis of a 30-year-old at various income brackets and assume that they work until age 65 and that they eventually start long-term care at age 85. Based on the current tax rate Washington residents would pay the following annual premium amounts based on their individual
If we assume that the lifetime benefit each Washington resident would receive will increase with inflation (estimated at the current 10-year average of 2.3%), at age 85 that worker would be entitled to a maximum lifetime benefit of $127,483. Now let’s assume that instead of this tax, that same 30-year-old saved their money and invested it in a moderate-growth portfolio with a 60% stock 40% bond allocation. Using the 15-year average returns of the US Total Stock Market Index (10.8%) and the Bloomberg US Aggregate Bond Index (4.29%) the historical return of a 60/40 portfolio should be 8.196% annually. Even if they only added money until their retirement at age 65 and then left it in the investments to grow, assuming historical returns, that 30-year-old would only have to save $160.39 a year to accumulate that same $127,483.13. If you make only the median Washington wage which, according to the Washington State Department of Social and Health Service is $35,989 a year, you really would only be paying $48.34 more a year to have this insurance than if you saved the money yourself. However, if you make $75,000 a year, this coverage is costing you $274.61 more than just saving the money yourself.
The scenario changes significantly however for older individuals. If we instead look at the numbers for a 55-year-old Washington employee retiring at age 65 (the fewest number of years you would have to work to receive benefits) who enters long-term care at age 85, the numbers start to look pretty good.
By the time that 55-year-old were to go into long term care their benefit amount would be roughly $72,204.10 at age 85. If that same employee had saved money from their paycheck annually and invested it in the same portfolio as that 30-year-old during the years they were working, they would need to save $944.32 a year in their last 10 years of working to receive that same dollar amount at age 85. Even a 55-year-old making $120,000 a year would still save money in this scenario.
Who is this law good for? The real winners under this new law are older employees planning on retiring in about 10 years. They will get the advantage of paying in over a relatively short period of time (10 years minimum) and will still be able to get a great return on their premiums.
Who is this not good for?
Younger Washington employees will pay in over a significant period and, while the tax pulled will go up as wages do, there is no definite word in the law on whether the LTC benefit will increase at the same rate. The law itself does say that the benefit amount should be examined and adjusted annually, however, it states that it must be “at a rate no greater than the Washington state consumer price index, as determined solely by the council.” This means that, while it will be increased over time, it could in fact be at a rate below Washington’s inflation. Even if the overall benefit increases at the annual inflation rate (2.3% for the last 10 years), younger Washington residents would have done better to save and invest the money themselves.
What about Washington non-resident employees or people who move out of Washington at retirement? This tax will hit hardest those Washington workers who reside just over the border or who move after retirement. These employees will have to pay the Washington tax but will not receive any benefit for the amounts paid into the trust.
Can you opt out? There is a one time opt out for those who have eligible private long term care coverage elsewhere in place by November 1, 2021. Washington employees who have coverage in place by this date can begin applying with Washington state to opt out of this insurance beginning October 1, 2021, through December 31, 2022. This opt out would create a lifetime exemption for those who apply, and it would be the job of the employee to present their opt out status at the time of employment. The state of Washington has yet to comment on the procedure for those who obtain the opt out and have insurance in place by November 1, but then lose LTC coverage after their initial examination. For those Washington residents who have acquired eligible LTC coverage and would like help with the process of signing up for the one-time exemption, check back our blog in the future for more information on applying for the exemption and the exemption process.