Washingtonians Preparing for LTC Tax - Time for Exemption is Nearing - Other States Looking to Follow

Despite being a big country, what happens in one place often impacts elsewhere. This can be true for the so-called "LTC Tax," which will cost Washingtonians starting in July of 2023. Nearly all W2 workers in the state will pay into the "Washington Cares Fund," which manages the state's plan.

Several states, including California and New York, are working on plans to implement their version of the Washington plan -Multiple States Considering Implementing Long-Term Care Tax.

Elizabeth Hovde is the policy analyst and Director of the Centers for Health Care and Worker Rights at the Washington Policy Center. She says state residents have a limited time to apply for their exemption if they own a qualified Long-Term Care Insurance policy. 

If you are a state resident with Long-Term Care Insurance, you must complete the form located on the "Exemptions" page of the Washington Cares website.  

The "Washington Cares Fund" in the State of Washington levies an uncapped 0.58 percent employee-paid payroll tax (which calculates to $580 for every $100,000 in income) to pay for a minimal benefit intended to pay for your future long-term care.

To avoid the state's payroll tax set to start in July 2023, you must have a qualified Long-Term Care Insurance policy purchased before November 1, 2021. You must complete the exemption paperwork by December 31, 2022. 

State Plan for Long-Term Health Care or a Tax?

Everyone else in the state that earns money will be subject to the tax. However, critics say they don't call it a tax since it provides a "benefit." The program offers a $36,500 maximum lifetime benefit account for long-term health care. 

The care must be received in the State of Washington, and you must be vested in the program (so it is not available immediately). This benefit account is set to increase starting in 2027 following the Washington consumer price index.

Long-term care costs in Washington are substantially higher than the amount of benefits available through the state plan. The benefits of the Washington Cares Fund will only cover a little of the actual cost of care. The LTC NEWS Cost of Care Calculator shows these costs are increasing rapidly.

This shows the 2022 median monthly cost of long-term care services in the Seattle area. Compared to the state and national average. Plus, you see the estimated cost in 2047.

Mandatory Social Program

Hovde says that lawmakers in 2019 created a mandatory social program. She says that Washington Cares Fund is to benefit some Washingtonians who have long-term-care needs and their caregivers.

Nearly all W2 workers will pay into Washington Cares, regardless of income, but only some people will benefit from the program — again, regardless of income. State lawmakers misguidedly created a safety net for people in need and people not in need.

Hovde points out that when a resident with a Long-Term Care policy goes to the fund's website to apply for the tax exemption, it isn't easy to find it.

The "Apply for an Exemption" button is buried on the "Exemptions" page after information about the program, the process surrounding exemption, a warning that you'll be permanently excluded from Washington Cares after becoming exempt, and what the state sees as benefits of its program as opposed to private Long-Term-Care Insurance. It fails to offer you full information about the differences between the two."

Partnership Long-Term Care Insurance and Policy Benefits

The Washington Care Fund ignores several benefits of Long-Term Care Insurance, including the partnership program, which provides additional dollar-for-dollar asset protection.

While many Washingtonians purchased small Long-Term Care Insurance plans to avoid the tax, most LTC Insurance plans will pay substantially more in benefits than the $36,500 benefit account provided by the fund. Hovde says that the $100 daily benefit provision was removed from Washington Cares. Now it's just the lifetime benefit of $36,500.

Partnership Long-Term Care Insurance provides dollar-for-dollar asset protection. If the policyholder were to exhaust all their benefits, they would be able to shelter part of their estate based on the total amount of money paid by the policy and still qualify for Medicaid. This is known as "asset disregard." No matter what happens, the policyholder with a Partnership Long-Term Care Insurance policy will never lose all their savings.

If someone receives benefits from the Washington Care Fund and exhausts them (a high likelihood if they require long-term care), they will pay out of pocket or be forced to have family become caregivers.

Medicaid would provide long-term care benefits for anyone with little or no income and assets. 

People Often Ignore Long-Term Care Planning

Many experts suggest more people should have considered buying an LTC policy, but for whatever reason, they chose not to do so. Many bought plans at the last minute to avoid paying the tax, but others ran out of time. No additional time is being given to allow state residents to purchase coverage and exempt themselves from the tax. Critics point to this as evidence that the state is more interested in the tax revenue than providing a long-term health care plan for long-term health care.

Many of those with Long-Term Care Insurance have applied for the exemption, but many more have yet to do so, according to the Washington Policy Center.

Since October 2021, when the exemption-application window opened, about half a million people have opted out of the payroll tax certifying they had private Long-Term Care Insurance in force. As of Oct. 14, 2022, the Employment Security Department reports the following:

• Total number of opt-out requests submitted: 479,711

• Total number of opt-out requests approved: 476,025

• Total number of opt-out requests processed: 479,624

• Applications processed as a percentage of the total: 99.98%

There are over 7 million people in the State of Washington, many of them between the ages of 18 and 65.

Is Washington Ready?

Is the state ready to handle the exemptions and process the tax? Hovde says an Employment Security Department spokesperson has assured her that the exemption team is prepared to handle the influx of applications expected.

Hovde states sometime next year it will know how many current workers are available to pay the tax for the rest of their working life. She has a question about the solvency of the program.

Even before one exemption application was approved, Washington Cares was not expected to be able to pay its way or fulfill its promises. Instead, the long-term-care payroll tax rate is expected to increase or the benefit decrease. It's not surprising nearly 500,000 Washingtonians applied for an exemption.

Will Other States Learn from Washington’s Mistakes?

Despite the questions regarding the Washington program and the payroll tax, several other states are marching down the same path. However, will they avoid the pitfalls Washington saw in their plan?

Claude Thau, writing in Broker World Magazine, says he expects other states to be more conservative in providing tax exemptions.  

To avoid the problem Washington experienced, other states will have a much stricter window for exemptions. For example, the New York bill says an individual can qualify for an exemption only if they purchased Long-Term Care Insurance prior to January 1 of the year the bill is signed.

California and New York Eying LTC Tax Next

California and New York are seen as the closest to implementing an LTC Tax; however, LTC NEWS reported recently that the California plan could be delayed if California Governor Gavin Newsom sees an opportunity to run for President. The governor may not want to run in the Democrat primary while implementing a new tax unless his team felt this would help him in the primaries if President Biden does not run for reelection. However, there seems to be widespread support for implementing a plan in California sooner than later.

The California plan proposals vary from $36,000 of coverage up to $144,000 for the most comprehensive option. The payroll tax on all earned income ranges from 0.58% of annual wages (like in Washington), including earned income, bonuses, vacation time, and the value of annual stock grants, to higher amounts for the more comprehensive plans.

Like in Washington, long-term health care services in California are expensive.

The New York plan could be scrapped altogether if Republican Rep. Lee Zeldin wins his race over Incumbent Democratic Governor Kathy Hochul. Polls have seen that race tightening. However, the bill could be passed and forwarded to the governor before the new governor was to be sworn in if Hochul were to lose. The bill could go to the floor for a vote as early as December and has solid Democrat support so the election may have little impact.

Unlike Washington, the proposed New York program is portable and would pay benefits nationwide. This feature would make it more costly, and those costs would be passed on to the New York taxpayer.

The tax rate in New York would be determined by the state comptroller to be "the lowest amount necessary to sustain the actuarial solvency" of the plan. After the law is passed, payroll deductions would start two years later. Critics suggest that the rate will continue to increase placing addition burden on taxpayers.

Tax or no tax, planning for long-term health care is still considered an essential part of retirement planning. The number of people expected to need help with daily living activities or supervision due to dementia will continue to grow as the country ages demographically.

Local state politics will play a big factor as to the speed to implementation of an LTC Tax. These are the states as of the date of publication that have discussion regarding the LTC Tax

• Alaska 

• California         

• Colorado         

• Hawaii  

• Illinois    

• Michigan         

• Minnesota       

• Missouri            

• New York         

• North Carolina 

• Oregon

• Pennsylvania    

• Utah

Mark Goldberg, President of FPS Insurance and specialist in long-term health care planning, said the need to plan is more important than ever.

What states are telling us by even considering a tax is that they can no longer go on assuming the costs of long-term care services. The single most expensive line item in every state budget is the cost of Medicaid. Medicaid's biggest cost is long-term health care.

The baby boomers were born after World War II, from 1946 to 1964. According to the U.S. Census Bureau, the oldest boomers will turn 74 next year. Goldberg says this is when many people start needing long-term care services. 

Medicaid pays for long-term care services for those individuals with little or no income and assets. Some of these people will exhaust their savings and seek benefits from Medicaid. Because of the large number of people who will need care now and, in the decades, ahead, Goldberg says the states are concerned.

No state is prepared for that expense on their budgets.

Goldberg suggests that individuals act while they are healthy and can qualify for Long-Term Care Insurance. LTC Insurance, unlike the state plans, is medically underwritten, so you must meet specific health requirements to obtain coverage.

Neither the plan in Washington nor any other state will pay for most long-term care costs. Tax or not, having an LTC Insurance policy will protect savings. Avoiding a tax would be an added benefit. 

Goldberg thinks most states at some point will enact their own LTC Tax; the question is when that will happen. If states adopt a plan like New York that would require you to have a Long-Term Care Insurance policy in place by the first of the year the bill becomes law, waiting until that happens would be too late to avoid the tax.

Even if you miss the deadline, having a policy would provide additional tax-free funds to pay for long-term health care that will cost much more than any state plan would provide.

LTC Insurance Critics Point to Premium Increases

Some state politicians and critics of Long-Term Care Insurance point to the high cost of policies and past rate increases as why the government should step in. However, today's Long-Term Care Insurance premiums reflect the low-interest rate environment, which was one of the primary reasons why older legacy LTC policies had increased. 

Most states have rate stability rules in place that have been very effective in maintaining stable premiums. LTC Insurance is also custom-designed, and premiums vary depending on the insurance company - How Much Does Long-Term Care Insurance Cost?

Hybrid policies are available that combine life insurance or an annuity with a qualified rider for long-term care benefits. While these types of plans are more expensive, premiums can never increase and include a death benefit.

Long-term care and aging-related challenges will persist. The largest wealth transfer in history will be made by baby boomers (including the Late Boomers) to their offspring, who will receive more than $68 trillion. Due to their demanding work and family obligations, many adult children won't be able to provide care for their parents. This makes caregiving challenging.

Although it is debatable how much of that wealth transfer will go toward long-term health care, with around half of all Americans 65 and older likely to require care, a significant portion of that money could vanish without careful planning.