Multiple States Considering Implementing Long-Term Care Tax
For many years, state and federal governments have enacted tax incentives to promote the purchase of Long-Term Care Insurance. Following the example set by the State of Washington, numerous states are contemplating implementing a tax on individuals who do not possess a qualifying policy.
More specifically, the "tax" may be a "benefit." The State of Washington was the first in the nation to enact a payroll tax to fund "Washington Cares," a state-run long-term care benefit. Yet, according to critics, it is best defined as a tax since the program provides such a small benefit that it is almost meaningless.
Washingtonians were granted a brief window to establish a qualifying Long-Term Care Insurance policy to circumvent the payroll tax of 58 cents for every $100 earned. This plan, however, was delayed when Gov. Inslee signed a law on January 27, 2022, postponing the program's commencement until July 1, 2023. The payroll tax is now in effect, and the state will no longer provide residents additional time to secure coverage to bypass the tax.
Supporters of the "LTC Tax" argue that the funds generated through the program will contribute to financing long-term care services. However, detractors contend that the provided benefits will have minimal or no significant impact, potentially straining many taxpayers' finances. Moreover, critics raise concerns that many residents may mistakenly believe they possess comprehensive long-term care coverage when, in reality, they do not.
Washingtonians who do not own an LTC Insurance policy will have a state-supplied benefit of $36,500 in lifetime benefits to pay for extended care needs. Considering that Washington is one of the country's most expensive states for long-term health care, according to the LTC NEWS Cost of Care Calculator, the state plan is hardly a plan for long-term care, and critics call it a cash grab.
For example, Seattle's average cost of in-home care is around $7100 a month (based on a 44-hour week). Nursing homes in Seattle average nearly $13,000 a month, but the cost is expected to average nearly $25,000 a month in twenty-five years.
Yet, many critics still oppose the LTC Tax in the state. Washington's Initiative 2124, also known as the "Opt-Out of Long-Term Services Insurance Program Initiative," is a controversial proposal allowing employees and self-employed individuals to opt out of the state's Washington Cares Fund. Passage of Initiative 2124 would make participation in the program voluntary, raising concerns about the fund's long-term solvency.
State Budget Pressure Due to Medicaid Spending Reason for Tax
The tax is intended to help fund the Medicaid program, the country's primary payor of long-term health care expenses. You must have little or no income and assets to qualify for Medicaid. Many families are unaware that traditional health insurance, including Medicare, only pays for short-term skilled care. Only Long-Term Care Insurance and Medicaid will pay for comprehensive long-term care services, including custodial care, which helps with daily living activities or supervision due to dementia.
Unfortunately, many people fail to plan for long-term care, which becomes crucial as declines in health due to illness, accidents, or aging in a person's health are inevitable. As aging progresses, a significant number of individuals will require assistance with daily living activities or supervision due to conditions like dementia. The Department of Health and Human Services projects more than 56% of those turning 65 will need some type of long-term service. Without a long-term care plan, individuals must either pay for their care out of pocket or rely on family members to step in as caregivers.
The burden on Medicaid is already significant and is only expected to increase in the future. While there is ongoing debate about whether federal or state governments are actively promoting Long-Term Care Insurance, there is a clear interest in finding ways to fund care for those who have minimal assets.
Medicaid is the largest payer of long-term health care expenses nationwide. To qualify for the Medicaid benefit, an individual must have little or no income and assets. As the American population ages and lifespans increase, state Medicaid budgets are under increasing pressure. With a rising number of baby boomers and Generation X individuals potentially requiring long-term care, states are actively exploring strategies to alleviate the financial strain on Medicaid systems.
More than 30% of U.S. states are considering implementing their versions of an LTC Tax, and numerous states are already in the process of drafting legislation similar to the Washington Cares Fund.
California Makes Progress on State-Funded Long-Term Care Program
California is making considerable progress toward its own state-funded long-term care program, and other states are close behind. Assembly Bill 567, introduced in January 2023, presents five options under consideration by a task force. However, to be clear, California has not adopted any plan.
Sources in Sacramento have told LTC NEWS that the earliest a new program could become law in Calfironia would be in 2025. It is anticipated that this program might resemble an enhanced version of the "Washington Cares," addressing some of the concerns that many in California believe exist with the current program.
Assembly Bill 567, introduced in January 2023, lrevealed five potential paths currently under review by a task force. A comprehensive 115-page report from consultant Oliver Wyman presents five potential programs for California. The recommendations include:
"Supportive benefits" offering $36,000 over two years, encompassing services like caregiver support, adult day care, meal delivery, transportation, durable medical equipment, and minor home modifications.
- "Targeted benefits" provide $110,400 over two years, covering the same services as the first option, plus home care and residential care facility benefits.
- Comprehensive benefits of $36,000 over a single year, offering the same coverage as the second option. This recommendation is said to be "inspired by the Washington Cares design with select updates."
- Comprehensive benefits of $81,000 over 18 months, including services covered in option three, with additional care in a skilled nursing facility.
- Comprehensive benefits amounting to $144,000 over two years, covering the same services as in the fourth option.
In summary, the proposed California payroll tax for long-term care bears a strong resemblance to Washington Cares, with a tax rate starting at 0.6% of income for the lowest benefit level. Unlike the Washington Cares Fund, California's proposal includes a cap on taxable income set at $400,000. The tax rate could reach up to 3% of income at the highest plan design. Additionally, the cost of the tax would be shared between employers and employees, distinguishing it further from the Washington model.
Politics and California
The timeline for California's proposed long-term care tax program could be influenced by political dynamics, according to a state senate source who spoke to LTC NEWS on condition of anonymity. Advisors close to Governor Gavin Newsom are reportedly concerned about the potential political fallout of introducing new taxes, particularly if President Biden opts not to seek re-election and withdraw before the convention and Newsom decides to pursue the Democratic nomination.
Opinions within Newsom's inner circle are divided; some view the proposal as a political liability in certain primary states, while others see it as an example of Newsom's commitment to progressive values. Nonetheless, it's expected that Newsom would sign the bill if it passes through the legislature and arrives on his desk.
Any tax in California would be on earned income, including bonuses, vacation time, and the value of annual stock grants. Most likely, anyone who owns and maintains a qualified Long-Term Care Insurance policy can opt out of the tax.
While there's some debate around permitting an annual opt-out for residents who acquire qualifying Long-Term Care Insurance coverage, sources indicate that the likelihood of this provision being included in the final legislation is slim. However, California may allow a brief window for residents to secure Long-Term Care Insurance to avoid the tax similar to what Washington allowed.
California, New York, Miinesota, and other states are also beginning the discussion process of enacting their own long-term care initiatives. The list of states that have had some level of political discussions on long-term care include:
- Alaska
- California
- Colorado
- Hawaii
- Illinois
- Maine
- Massachusetts
- Missouri
- Minnesota
- New Hampshire
- New Mexico
- New York
- North Carolina
- North Dakota
- Oregon
- Pennsylvania
- Utah
- Vermont
The New York legislature is revisiting a proposal to fund a state-provided long-term care program through a payroll tax that would affect most state workers. Questions remain about the bill's specifics and its administration if enacted.
The legislation is similar to a proposal that failed to pass in 2022. Senate Bill S8462 mirrors the earlier attempt, aiming to establish the New York Long-Term Care Trust Program. This program would offer benefits to eligible residents who have paid into it, modeled in part after Washington State’s long-term care payroll tax program.
A significant distinction between New York's proposition and WA Cares is that New York's plan would tax workers based in the state, irrespective of their state of residence. This could affect workers residing in Connecticut, New Jersey, and Pennsylvania. Additionally, in contrast to WA Cares, New York's long-term care benefit would be portable, allowing workers to avail of the benefit nationwide.
In Minnesota, lawmakers have drafted a bill resembling the Washington Cares Fund. The proposed legislation stipulates the provision of 365 Benefit Units, each valued at $100, to eligible beneficiaries for payment to qualified providers. This benefit would be financed through a state payroll tax specifically allocated for long-term care.
Lawmakers are exploring several other legislative proposals related to long-term care. Like New York, Minnesota already provides a financial incentive for purchasing Long-Term Care Insurance, offering a 25% tax credit on the premiums paid. This credit has a limit of $100 per beneficiary, but for married couples, a single policy covering both spouses can receive a maximum credit of $200.
Most states will allow for some exemption from the tax if a resident already has a qualified Long-Term Care Insurance policy in place. However, most states may require a policy to be in place prior to the enactment of the law. Unlike in Washington, residents of these states may not have time to get coverage once the bill becomes law.
Younger Workers Must Pay Tax
While most experts suggest planning for the costs and burdens of aging as part of retirement planning, the tax in these states may force people, even younger ones, to obtain coverage. Otherwise, these individuals will pay a tax for the rest of their lives.
Younger individuals anticipating a higher lifetime earning potential should consider procuring coverage immediately. There are several traditional Long-Term Care Insurance options available, but life insurance policies featuring a qualifying rider for long-term care — meeting the legal requirement under Section 7702(b) of the U.S. Code — are reasonably priced and available to those as young as 18. These life policies cater to a crucial life insurance need and offer a qualified long-term care benefit, exempting them from the LTC tax.
Remember that long-term health care services come with high costs, which escalate annually. Traditional health insurance, including Medicare and supplemental plans, does not cover these expenses.
The LTC NEWS Cost of Care Calculator shows the current and expected future cost of care services nationwide based on the major cities throughout each state.
When securing LTC Insurance coverage, experts suggest avoiding settling for the most basic plan. Obtaining an affordable Long-Term Care Insurance policy protects your income and assets from the exorbitant costs of long-term health care. But the benefits extend further. You'll gain access to your preferred quality care services, including in-home care, thereby alleviating any potential strain on your family. Consider it a form of protection for your 401(k) and other retirement accounts.
Select a Qualified Policy That Meets Federal Code 7702(b)
Since there may be little or no advance notice before a state enacts a tax, don't delay obtaining coverage. You must have a tax-qualified Long-Term Care Insurance policy following Section 7702(b) of the U.S. Code.
Seek the assistance of an experienced Long-Term Care Insurance specialist representing the top companies. Premiums can vary over 100% between companies for the same coverage. LTC Insurance is medically underwritten. The specialist will match your age, health, and family history with the right company and provide accurate quotes from all the top insurance companies - Find a Qualified Independent LTC Insurance Specialist.
Obtaining the smallest plan possible that gets you out of the tax might be tempting. It would be wise to avoid getting the cheapest available plan unless you have little income and don't expect to earn more in the near future.
You can replace or add to your coverage when you start earning more income, but remember, the coverage would be priced based on attained age and health.
Some LTC Insurance policies lack inflation benefits and are not partnership certified. These two items are essential to have in a policy. Few employer-sponsored plans exist, and those that do are usually not your best option for long-term care planning unless you have health issues limiting your choices or want something that eliminates the tax at the lowest cost possible.
No New Federal Plan on the Horizon
It is advisable to avoid delaying action while waiting for Washington DC's intervention. Although President Biden has discussed enlarging tax incentives for policy purchases, there's minimal support within Congress to advance beyond their current actions.
Even though there have been suggestions to implement a nationwide plan, they've garnered scant support. Various strategies have been put forth, ranging from a national long-term care plan to permitting the penalty-free use of qualified retirement funds to cover LTC Insurance premiums.
Federal Tax Incentives Exist. Partnership Plans in Most States Available
The existing federal tax benefits will continue. The Long-Term Care Insurance Partnership program provides further asset protection on a dollar-for-dollar basis when you own a qualifying plan, with most states participating in this program.
The prospect of needing long-term health care is a genuine reality at some point in life, and states don't have the financial capacity to cover everyone's future care. Thus, preparedness is advisable, regardless of tax considerations.
During a speech on October 28, 2021, President Biden acknowledged that the millions of Americans in the so-called "sandwich generation" often feel the financial strain of simultaneously raising a child and caring for an aging parent.
To describe this as a family crisis would not be an overstatement. The impact of long-term health care is significant. Caregiving is tremendously emotionally, physically, and financially challenging for family members who are forced to become caregivers.
Remember that Long-Term Care Insurance is subject to medical underwriting, so it's wise to acquire coverage quickly when still in good health. Postponing could potentially affect not only your state's tax situation but also your insurability.
States are striving to find solutions to the escalating challenge of aging and long-term care. Many experts anticipate that more states will establish similar long-term care tax programs in the upcoming years. In the meantime, taking proactive steps in planning is strongly recommended for you and your family so you can prepare for the costs and burdens of aging. A comprehensive retirement plan for many Americans should include Long-Term Care Insurance.