Should You Opt-Out of The Washington Long Term Care Tax?
A new insurance program–and a payroll tax related to that initiative–are hot topics among residents of Washington State right now. It’s safe to say this tax, known as the Washington Long Term Care tax, which will fund the first public long-term care insurance program in America, hasn’t been universally popular. Washingtonians were set to start feeling the effects of the tax in January 2022, however, political controversy and legal challenges resulted in two last-minute delays, and now the program has been delayed until July of 2023. Those choosing not to participate in the long-term care tax needed to have a long-term insurance plan in place by 11/1/2021 if they wish to opt-out.
Are you unsure what the Washington long-term care tax does, or whether or not you qualify to opt-out from it in 2022? If so, you’re in the right place. We’re going to break down the jargon and give you the answers you need to make the right decision for YOU.
What is the Long-Term Care Program?
Washington’s long-term care tax program, also known as the “Washington CARES Fund” program was initially approved by the legislature back in 2019. They created the program in response to concerns that aging state residents wouldn’t be able to pay for support services–like nursing care–in the future.
When it kicks in, the program will let eligible Washington residents use a lifetime benefit up to $36,500 ($100 per day for 1 year). To be eligible, you’ll need to pay program taxes for at least a decade (uninterrupted by five-plus consecutive years), among other requirements. The benefits will be funded by a new payroll tax, costing state residents $0.58 per $100 of wages. People enrolled in the plan will be able to use these funds to pay for a variety of services, including:
Time in a nursing home
In-home care
Wheelchair ramps, and other home renovations
In its current form, the payroll tax funding this program is uncapped. It also applies to any wages earned by Washington residents–from salaries, to bonuses, and even income from vesting stock grants. This new tax does NOT apply to long-term capital gains resulting from the sale of stocks.
Under the original timeline, the program was intended to start operating in 2025. With that said, the legislature delayed the tax designed to fund the program less than a month before it would have taken effect. Between now and the tax’s new intended start date in July of 2023, the legislature aims to adjust the program.
Benefits of the Fund
According to the Insurance Commissioner’s Office, costs associated with private insurance plans for long-term insurance have skyrocketed in the past five years.
Making matters worse, many of these insurance plans force people to keep paying after retirement. In contrast, Washington’s program focuses on taxing wages. That way, state residents will only need to pay into the program while still working.
Of course, the fund comes with some major perks for the state government too. By 2052, it should save the state of Washington an eye-popping $1.9 billion in Medicaid expenses.
Which Employees Are Required to Pay the Long-Term Care Tax?
Let’s assume for the moment that you don’t opt-out of the Washington long-term care tax program before the December 31, 2022 deadline. In that case, the tax will be permanent and mandatory.
This is also true if you move to Washington state after the opt out window closes (after 12/31/2022) and you didn’t already own long-term care insurance with a policy date before 11/1/2021.
If you have children in highschool or college who will be entering the workforce after the 12/31/2022 deadline AND they don’t own long-term care insurance with a policy date before 11/1/2021, they also will be permanently opted into the program. This is because you must be at least 18 years of age on the date you apply for the exemption. It can be challenging to purchase long-term care insurance under age 18, and you still need a policy date prior to 11/1/2021 so if you’re reading this now and don’t already own a policy, you’re out of luck.
Note that this is not too different from moving from a state without state income tax to one that does have state income tax. You’re automatically opted into paying that state’s resident income tax, too.
It’s also crucial to remember that the tax spans beyond Washington–it’ll also impact you if:
Your employer is based in Washington.
Your company’s employees aren’t based in Washington, but they conduct business there.
Your business’ services are controlled/directed from Washington.
To make a long (and, admittedly, boring) story short, this means that some out-of-state employees may need to pay this tax, and some out-of-state employers will need to collect this tax from their employees.
Why Opt Out of The Washington Long Term Care Tax?
Due to the recent delay, significant changes could be coming to Washington’s long-term care program and the associated payroll tax. Before this announcement, countless people living in the state scrambled to opt-out of the program. Obviously, these people wanted to avoid the tax in the short term, but this isn’t the only reason why they made this decision.
Retiring Soon?
People planning to retire in the relatively near future wouldn’t be able to claim the benefits of the long-term care program since they couldn't pay in for ten years. Along with that, the program doesn’t support retirees who move out of the state in its current form. Sorry, if you want to move to Florida, your care is on your dime.
A High Earner?
Another notable issue is that the benefit is currently capped, yet the tax is uncapped. Some high-earning Washington residents may find themselves paying considerably more into the long-term care program than they could stand to benefit from it ($36,500 in a lifetime). With that in mind, it’s no surprise that these people moved quickly to opt-out, especially since the application period for this process began in October 2021 and lasted just a few months.
If You Missed the Deadline
Assuming you don’t already have a private plan for long-term insurance in place, it’s too late to apply for an exemption from Washington’s payroll tax because insurance carriers won’t allow for “backdating” a new policy today. Exemptions were only available to people who had this insurance by November 1, 2021.
The good news is that people who do have a private insurance plan still have months left to submit their exemption applications. The state’s Employment Security Department will accept these applications through December 31, 2022.
Keep Your Opt-Out Letter Handy
If you have opted out of the program, make sure to keep your opt out letter handy! You’ll need to show this letter to every future employer so that they know to not collect the tax from you.
You’ve probably received a barrage of emails from your employer, but if you haven’t already alerted them that you’ve opted out of the program, do so ASAP! This lets them know to not collect the tax on your behalf.
This is an important final step! Just opting out at the state level isn’t enough, you also need to notify your employer because it’s their responsibility to collect the tax from you.
How To Know What’s Best For You
Even if you live in Washington and already have private long-term insurance, you may still be thinking about your options. The Washington Cares Fund program and private long-term care insurance both have their advantages and drawbacks. It’s important to make the right choice because it will be permanent–and the clock is ticking.
Like any major financial decision, making up your mind on long-term care can feel overwhelming. To ensure you’re making the right choice for your own future, the best step you can take is working with a wealth advisor and tax expert.
Consilio Wealth Advisors can give Washington residents the reliable advice they need without all the industry jargon. They offer clear, straightforward advice based on your financial goals. When you’re forced to make a permanent decision–like the Washington long-term care tax–it’s crucial to know you’re doing what’s right for your future. Don’t make the decision alone–lean on Consilio Wealth Advisors.
Disclosures
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
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