Updated Sept. 17, 2021
A substantial new WA State tax on wages will go into effect Jan. 1, 2022 that most people are not aware of. This is something we’re starting to discuss with clients because the tax is not capped: it is 0.58% annually on ALL work income reported on W-2s, including income from stock options, RSUs and other types of equity comp.
How this came about: On May 13, 2019 Governor Jay Inslee signed into law the creation of the nation’s 1st Long-Term Care Trust Fund. The Fund will raise money through payroll taxes to provide benefits for eligible WA residents. It’s quite possible that other states will look into implementing their own Long-Term Care Trust Fund at some point and perhaps the federal government will also get involved.
The reason: Across the US, some 10,000 people a day are currently entering retirement, and many have no way to pay for the care they will need in old age. Medicare and Social Security do not cover any of the costs of long-term care. Therefore, Medicaid, the joint federal and state program for low-income Americans, is the largest payor for long-term care services, putting increasing strains on state budgets. Here in Washington State, spending on Medicaid long-term care expenses is about $4 billion annually.
THE IMPACT ON HIGHER-INCOME HOUSEHOLDS
- This new tax is levied on W-2 income only. If you’re self-employed, this tax won’t apply to you. Also, it does not apply to capital gains and other investment income.
- There is no cap on the tax of 0.58% (58 cents per $100 in income). Someone with $1 million in W-2 income during 2022 would pay $5,800 more in payroll taxes.
- The lifetime benefit provided by the Long-Term Care Trust Fund is initially $36,500 adjusted for inflation, with the first payouts starting in 2025. What this means: higher-income workers can end up paying much more into the Fund than the benefit provided and still not have adequate long-term care. The average cost of long-term care in Washington State ranges from $66,000 to $199,000 per year, depending on services provided and location.
- You must stay a resident of Washington State to qualify for Fund benefits. If your primary residence is outside of WA for five years or more, you will forfeit all benefits and taxes paid. I’ve listed the other qualification criteria at the end of this post.
POTENTIAL TO OPT OUT
There is a limited individual exemption for employees who do these two things within a very specific timeframe: (1) Purchase qualifying private long-term care insurance by November 1, 2021; (2) Apply for a program exemption between October 1, 2021 and December 2022, which attests that the employee obtained the long-term care policy before November 1, 2021.
STRATEGIES
Is it more cost-effective to pay for a basic long-term care policy vs. paying into the WA Long-Term Care Trust Fund? It might be for healthy workers in their 40s and 50s. The tricky thing about traditional long-term care insurance, though, is that premiums can rise dramatically over time as you age. And if you stop paying the premium, you lose coverage. In contrast, you would stop paying into the WA Long-Term Care Trust when you are no longer employed or retire yet your benefits will still be there.
One solution that we’re exploring for clients is hybrid policies — long-term care insurance coupled with life insurance. Hybrids have been around for a while and have had relatively stable premiums. And they may be easier to qualify for. Some insurers use only a health questionnaire (no medical exam), and require a background check and phone interview.
Another benefit of hybrid policies is that part of the benefit not used for long-term care will be paid out as life insurance upon death. And you can get part of your premiums refunded if you cancel the policy after a certain period of time. Also, coverage would be nationwide, instead of just in WA State.
There are many variables here and there’s no approach that is right for everyone. Many people are likely to be fine with paying this new tax, which applies only to W-2 income (not investments). The important thing is to be aware of this new tax and what you can do to opt-out if that is the route you want to take. Get our long-term care insurance shopping checklist here.
Taxes changes at the federal level could also happen in the coming year, especially for higher-income households. Find out what is likely from LNWM’s Kristi Mathisen.
WHO ACTUALLY QUALIFIES FOR LONG-TERM CARE TRUST FUND BENEFITS
Washington residents at least 18 years old who have paid the payroll tax for either: (1) three out of the past six years; or (2) for a total of 10 years, with at least five of these years paid without interruption. Each year, at least 500 hours of work is required to qualify.
To get benefits: Must need assistance with at least 3 out of 10 Activities of Daily Living (“ADLs”): medication management, personal hygiene, eating, toileting, transferring, body care, bathing, ambulation/mobility, dressing, and cognitive impairment.
