By Jacob Benson and Michelle Masson

By now, many of you have heard about the new Washington state LTC tax.  We want to help alleviate some confusion and give you the info you need to make educated decisions.

Q: What is this new law?
A: Washington state is creating a new payroll tax to fund a state-sponsored long term care benefit program.  Beginning January 1st, 2022, all employees will be taxed 0.58% on wages/salary, bonuses, stock options, RSUs, severance pay, and any other income on your W-2 in box 1.  All eligible persons will qualify for the same benefit amount, regardless of the amount of tax paid or the number of years worked. The maximum benefit from this state plan is $100 a day for up to one year, or $36,500 lifetime total.

Q: I’m self-employed.  Will I have to pay the tax?
A: It appears the LTC tax only affects non-owner employees (W-2 workers). Sole proprietors, partners and LLC owners appear to be excluded. Excluded workers can elect to be covered but read the details carefully before you consider this option.
Q: What happens if I don’t do anything?  Is there a reason to take action?
A: If you are a young worker, high income earner (over $150,000 annual pay), plan to retire out of state, or plan to retire within 10 years, then paying into the state’s LTC plan is likely not financially beneficial for you. Depending on your yearly wages and number of working years until retirement, you might end up paying more than the allowable benefit.  Most private or group policies provide more generous benefits for the same cost.

Anyone planning to retire before January 1st, 2025 (the first day to apply for benefits) would pay taxes without ever being eligible to receive payments.  The state program has a 10-year vesting period, so if you retire before January 1st, 2032 you may receive lower benefits despite paying the full tax.

If you intend to retire somewhere else, you will want to opt out.  Once you move outside of Washington state for five or more years, you forfeit the state benefits, even if you paid the tax for more than 10 years prior to moving away.

Q: What do I need to do?
A: The first step is to determine if a private LTC insurance would be more cost effective than Washington State’s LTC plan. We can help you make this determination, and put you in touch with insurance agents we trust. You should also check with your life insurance provider as some life insurance policies can include an add-on LTC rider. Note that many insurers are no longer accepting applications for private coverage, demand has exceeded their underwriting capacity.  It’s best to pursue any available option and then shop around next year if your plan seems less than stellar.  If you want to avoid paying this tax, you must have your own LTC insurance in place before November 1, 2021. Once you have outside LTC coverage, you need to apply to the state under the LTC exemption.

The LTC insurance application process may take up to several months, so it is crucial to begin the process now. Simply applying for LTC insurance coverage is not enough to qualify you for exemption from this tax; the insurance must be active before the deadline.

Q: What if I elect out of coverage but later find out I don’t meet the coverage exemption requirements,  is there a penalty?  
A:  There does not appear to be a penalty mechanism in place for employees that elect out of coverage but later find out they don’t qualify. This will likely be addressed by future regulation. For employers that do not withhold the tax, expect to pay typical employment tax underpayment penalties.
Q: What if I qualify to elect out of State coverage and cancel my private coverage next year?
A: It’s hard to believe but that is OK.  Once you qualify for the exemption, you’re out permanently!
Q: What if I want to send a political contribution to the folks that sponsored this legislation?
A: Here is a link to the bill with some names at the beginning of the bill for your consideration:

Bottom Line:  Clearly your State Legislators intend to shift the cost of long-term care, often covered by Medicaid for low-income residents, onto the backs of workers-- particularly high-income workers. High income workers should think of this as a tax rather than insurance to be avoided via any legal means. The tax provides additional incentive to encourage low-income workers to work and retire in Washington State and discourage high income workers from relocating in Washington State. Lawsuits have been filed to throw out the legislation!