Washington state long term care tax offers lessons for everyone

If you have never thought about long-term care (LTC) insurance before, take notice of the new payroll tax that Washington state implemented on July 1. It could spark similar action that eventually spills across the border and affects your clients. 

WA State Cares Act, or WA Cares, is a payroll tax applied to all W-2 income (but not 1099, K-2, or any distribution income or capital gains) at a current rate of .058%. With the cost of Medicaid projected to increase over the next decade, this tax program was created so the state could put more money into its operating budget.

Further, WA Cares is marketed as a benefit to residents, giving them the impression that they have LTC insurance, should they need it in the future. And they do, but there are caveats — which is why this program and its stipulations, as well as the timeline on which it was rolled out, raise some crucial recommendations for the future. 

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Other states across the country may be exploring similar programs, so brokers and advisers should be informed and stay ahead. Here are a few lessons we can take away from WA Cares: 

Lesson #1: The LTC benefits are limited and insufficient.

The WA Cares benefit is at Medicaid-level reimbursement of $100 a day, with a 365-day maximum — in other words, a $36,500 lifetime maximum. While that sounds like a decent total, consider this: The average cost across the country of in-home, full-time care for seniors is $5,148 a month. That does not include additional expenses like medication or home modifications like a ramp for a wheelchair, or bathroom or tub renovations. 

WA Cares is described as a program that is "designed to help you live independently in your home as long as possible." At the monthly cost noted above, a full year of in-home care would cost $61,776; the WA Cares maximum benefit would therefore only cover a little over half of a year. And that's if you only use the money toward in-home care costs.

Lesson #2: The benefits are not immediately accessible, nor are they available to everyone.

In addition, anyone who moves out of the state loses them. It is important to note that WA Cares funds are only available to working Washingtonians who have contributed to the fund, meet the requirements and need care within Washington state. This eligibility is often determined by healthcare providers and the Department of Social and Health Services.

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According to WA Cares' vesting schedule, workers who began contributing on July 1, 2023, cannot access the benefits until July 1, 2026. But even then, the withdrawal amount is limited. It takes 10 years for an individual to be fully vested in the benefits. And a worker who moves out of state does not get to take with them the amount they have already paid. Furthermore, a worker who resides outside of Washington but generates income with a Washington-based company is paying taxes on services they cannot receive (as opposed to someone who does not use the benefits in the future for some reason).

Lesson #3: The time period for individuals to opt out and find other LTC insurance was too short, and the marketplace was flooded.

Washington state residents did have the opportunity to opt out of paying the tax if they found and enrolled in a qualifying plan elsewhere. However, the marketplace for LTC plans was only open for four months, which left limited time for individuals to obtain other coverage. Also important to note is that new residents of the state or people just starting in the workforce do not have the opportunity to opt out.

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On the positive side, WA Cares has raised the level of awareness about LTC insurance — both for individuals who are looking at their own financial planning packages and for brokers, advisers and even leadership of organizations to consider. More states may implement these additional taxes in the future, which will impact workers' wages and organizations' benefit packages.

Be aware, though, that there may be a reduction in LTC offerings because carriers may not be able to meet demand, and as a result, also may be unable to absorb the financial risk. Agents whose state announces an LTC insurance tax should know where the benefit market is, be ready to share it with clients and prompt them to be mindful of any time limitations to opt out. In addition, they should be prepared for a market that may be insufficient to meet demand.