As you may have heard, the Washington State legislature has passed a payroll tax to help fund the first state-run long-term care insurance program in the country. Money raised by the tax will be used to fund long-term care coverage for people living in Washington who have paid into the system. The program is intended to help ease the burden on Medicaid, which pays for long-term care for those who can’t afford it.

The Tax
Beginning January 1, 2022, employees in the state of Washington who receive W-2 income will be taxed .58% on that income. Income subject to the tax includes all compensation (salary, bonuses, severance pay, company stock, such as RSUs). For an employee earning $100,000, that equates to $580/year. For an employee earning $500,000, the tax will be $2,900. Unlike Social Security, there is no income cap, so all income is taxed. Self-employed individuals are not subject to the tax and there is no employer-funded premium.

The Benefits
The insurance pays a maximum of $100/day up to $36,500 – or one year of coverage. You are only eligible to receive benefits if you are living in Washington; if you move out of state, you lose the coverage. Only people who have paid into the plan for at least ten years without a break of five or more years, or who have paid the tax for at least three of the six years prior to applying for benefits will qualify for coverage. The range of services covered is fairly broad and does include home healthcare. The Department of Health and Human Services must confirm that a participant requires assistance with at least three activities of daily living before benefits will be approved. (Private policies generally require that the insured needs assistance with two activities of daily living before receiving benefits.)

Opt-Out Option
For people with conditions that prevent them from obtaining long-term care coverage and those with low incomes, the state-run program may be appropriate. However, relative to private policies, coverage under the state program is quite limited. You can purchase your own insurance and opt-out of the Washington program, but you must submit an application for exemption to the Employment Security Department between October 1 and December 31 of this year – and your private coverage must be purchased before November 1, 2021. The opt-out is permanent, and once you’ve received a waiver, you may not participate in the program at a later date.

Traditional long-term care policies are expensive, premiums can go up dramatically, and you don’t receive the premiums back if you don’t use the policy. However, there are now long-term care insurance options that are much more attractive than these older policies. It may be possible to add a long-term care rider to a whole life insurance policy or purchase a hybrid policy that provides you or your estate  with a return of premiums if you don’t use the policy. Even if the cost of private insurance is greater than the cost of the tax, it may make sense to purchase the private insurance, as it would most likely provide greater benefits which would be available to you regardless of whether you’re living in Washington state.

What Should You Do?
Should you purchase coverage and apply for an exemption? Depending on your income level and your age, it may make sense. High-earners or younger people who will be paying into the program for many years may want to purchase at least a minimum level of private coverage. If you are a high-earner retiring before the benefits become available in 2026, you should investigate a private policy. If you think you will be living outside the state of Washington when you retire, you may also consider a private policy.

Annual long-term care costs average between $50,000 and $130,000 or more in Washington State. Regardless of whether you are subject to the new Washington State tax, it makes sense to assess your situation and see whether long-term care insurance is right for you. And if you earn W-2 income in Washington State and think opting out may be right for you, please contact your Fulcrum advisor. We can help determine whether it makes sense for you to opt-out by purchasing coverage prior to the November 1, 2021, deadline.