Did you know that all employees in Washington state – all of them – will pay a new payroll tax starting on January 1st, 2022 to fund a long-term care trust? Washington is the first state in the nation to create a publicly funded insurance program of this sort, and it’s going to be funded by you if you are a Washington W-2 wage-earning employee, which includes practice owners. But will you benefit from your own contributions? Perhaps, but this depends.
The Need, Pros, and Cons
On the one hand, this program is meant to build up benefits for people needing long-term care, and there is a dire need. Unless someone is indigent and contrary to what many believe, Medicare does not cover the cost of long-term care. Further, 1 in 7 people will need long-term care in their lifetimes, the average event starts at age 78 and lasts for 2.8 years[1]. In the northwest, the cost of care varies by the level of care given from homemaker services to adult daycare, assisted care, nursing homes or memory care for example. Today those costs range from $50,000/year to $100,000+/year, and costs are rising or inflating by 6.5% annually 1. Yikes! Are you or your assets able to cover these expenses at your age(s) 80? Or have you considered how those costs could devastate retirement income for any survivor(s) if not planned out? For some, may not be an asset problem, but instead, long-term care expenses can create cash flow and tax issues. The problem is what will it cost in taxes to generate an additional $50,000 to $150,000 in annual cash flow on short notice? Here is an excellent website to explore more about the odds and cost of a potential LTC event in your own life:
https://www.genworth.com/aging-and-you/finances/cost-of-care.html
There is a need to fund such a program, and you could personally benefit from it. Chances are it won’t likely be enough, but it could help to defray some costs because the total lifetime benefits are capped at $36,500/person and adjusted for inflation.
On the other hand, there are caveats to the program which are concerning, and the biggest is that if you are vested into the program (i.e. you pay into it via this new payroll tax) and then move out of Washington, you will then not be eligible to receive benefits. Another concern is simply that all taxpayers are funding it, and 3 out of 10 taxpayers won’t need long-term care.
How Will This Program Work? 2
Beginning on January 1, 2022, each W-2 employee over age 18 who has not opted out of the program will pay a premium tax through a payroll deduction. It is optional for self-employed workers. The initial premium will be $0.58 for each $100 earned, and there are no limitations or a cap. Approved benefits for those who are vested will begin 3 years later, on January 1, 2025, and the lifetime maximum per person will be $36,500 per person, adjusted annually. Note that if individuals are already fully retired, they are not vested, and thus won’t receive benefits. But as mentioned above, even if someone is vested, they will not be eligible to receive benefits if they have moved out of the state for 5 years or longer or no longer reside in WA.
Will This Benefit You?
Perhaps. Wouldn’t it be nice if we all had a crystal ball? The odds are that you will need long-term care, and if you do, then you will benefit from not only your own contributions but the benefit pool, as long as it remains funded, that is. If you’re fortunate and don’t need long-term care, then you’ll be contributing to the greater good.
Can You Opt-Out?
Yes, but only if you are over 18, have “long-term care insurance” and submit an exemption application by July 24th, 2021. I put that into quotes because there are different products and strategies which may qualify as LTC insurance:
- LTC riders* (and possibly some chronic illness riders) on individual or group life insurance or annuity products
- Qualified LTC insurance contracts
*A rider is an optional feature that can be added to an insurance policy, like a bell and a whistle.
If you don’t have any of these, you’re not alone and they’re not necessarily expensive to obtain. For example, some life insurance carriers offer term life insurance policies with LTC riders which may very well qualify.
If LTC is something you haven’t addressed and it’s been on your mind, there are many options out there. Some of these options may be more affordable than you realize. A good time to address LTC in retirement planning is sooner than later.
If you have life insurance and/or an annuity product and you’re not sure if it would qualify as a possible exemption, reach out to your financial professional or the insurance carrier to ask!
In sum, this tax is coming to Washingtonians, so being aware of it is important and understanding your options is smart. If you plan on staying in WA state forever, this program could be fantastic news, and fitting it with another product or strategy to help mitigate this risk might be right for you. Qualifying and applying for an exemption might be a consideration if you are leaving the state at some point, for good or for more than 5 years. Either way, this Act is an excellent reminder to address your own long-term care! Consider working with a product-neutral financial advisor to help you look for LTC strategies which are a good fit for you, your budget and your needs.
By Darby Affeldt, DVM, RICP, Financial Advisor & Associate Partner, North Star Resource Group. She can be reached at [email protected].
North Star Consultants, Inc. – Insurance Products and Services. CRI Securities, LLC – Securities and Investments. Securian Financial Services, Inc. – Variable Products and Securities. Securities and investment advisory services offered through CRI Securities, LLC and Securian Financial Services, Inc. Members FINRA/SIPC. CRI Securities, LLC is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Consultants, Inc. is doing business as North Star Resource Group and is independently owned and operated. Darby is a registered representative and investment advisor representative of CRI Securities, LLC and Securian Financial Services, Inc. 2701 University Ave SE, Minneapolis, MN 55414. Financial Professionals do not provide tax or legal advice, and this should not be considered as such. Please consult a tax or legal professional for advice regarding your specific situation. Please keep in mind that the primary reason to purchase a life insurance product is the death benefit. 3457163/DOFU 2-2021
1 https://www.genworth.com/aging-and-you/finances/cost-of-care.html
2 Washingtonians for a Responsible Future, Long-Term Care Trust Act Fact Sheet, https://responsiblefuture.org/the-ltc-trust-act/#:~:text=The%20Long-term%20Care%20Trust%20Act%20would%20set%20up,care%20needs%20over%20months%2C%20years%20or%20even%20decades.com
Posted April 2, 2021