Washington State Long-Term Care Trust Act: What Residents Need To Know

For public policy reasons, Washington State passed a new law in 2019 that created a state funded Long-Term Care Trust (WA Cares Fund) to become effective on January 1, 2022.

How it works

The new law requires all Washington state employers to apply a new payroll tax on their employee‘s compensation (currently at a rate of 0.58%) to be used to fund future long-term care benefits for eligible Washington residents. The payroll tax is not capped and is applied to all W-2 compensation. Employers will withhold this tax from each employee’s paycheck and submit the payments into a new Washington State Long-Term Care Trust for future benefit payouts.

Eligibility requirements to receive benefits under the new law are strict and could limit the ability of those who pay into the Long-Term Care Trust from receiving any of the benefits. Even if the requirements are met, the total lifetime payable benefit is limited to $36,500.

A subsequently passed amendment bill following signing of the Washington State Long-Term Care Trust Act provides for a one-time option to “opt out” of the state-run long-term care insurance program, provided an individual has existing long-term care insurance by November 1, 2021.

In order to be able to “opt out” of the state insurance program, we are encouraging all of our working Washington State clients to review their existing long-term care insurance or consider purchasing long-term care coverage (either as standalone insurance or a specific long-term care coverage rider to a life insurance policy).

Eligibility requirements and benefits

An individual can become eligible for long-term care benefits under one of two situations:

1. They have paid into the program for at least 10 years (i.e., paid the payroll tax on all compensation, with a minimum of 500 hours worked per year); or
2. They have paid into the program 3 of the last 6 years.

If an individual qualifies for benefits under the 10-year rule, then as long as they remain a Washington resident they will qualify for those benefits. If an individual qualifies under the 3 of the last 6 years rule, then they qualify for benefits only as long as they meet the 3 of the last 6 years requirement (e.g., 4 years after retirement, an individual no longer qualifies under this rule).

In addition to meeting the payroll tax requirement, an individual must also be a Washington resident to be eligible to receive benefits. An individual who has been a non-resident for five or more years combined loses their eligibility.

An eligible individual may receive benefits for a variety of long-term care costs with certain daily limits and a lifetime maximum cap of $36,500 (which might be adjusted for inflation at the elections of a committee).

Why consider a private insurance option in order to “opt out”?

There are significant issues with the state-funded insurance option, including:

• Strict eligibility requirements rule out or limit coverage for:
  • those with less than 10 years until retirement;
  • those who work part-time or are planning on taking extended time off from work; and
  • anyone contemplating a move to another state in the future.
• Maximum lifetime benefit cap of $36,500 per person is not enough coverage to meet the majority of expected long-term care costs for those who might need it.
• Payroll tax is not capped, so all W-2 compensation will be subject to the tax with no additional benefits based on the amount paid, irrespective of how much you may have paid into the Trust over the lifetime benefit cap amount.

How to “opt out” and avoid the payroll tax

Any traditional employee must “opt out” in order to avoid the payroll tax on all Washington state compensation for as long as the program is in existence. An individual will have one opportunity to “opt out” by purchasing comparable or better long-term care insurance by November 1, 2021. Alternatively, anyone who is self-employed, or an independent contractor, must “opt in” to the system if they prefer to choose the state-run insurance program.

The state will provide a system for applying for an exemption from the payroll tax between October 1, 2020 and December 31, 2022, but the replacement private long-term care insurance must be purchased by November 1, 2021 (not December 31, 2022). Once exempt, the employee will be permanently ineligible for WA Cares Fund coverage.

Next steps for Washington residents

Individuals have several options for purchasing private long-term care insurance and selecting the right option and plan will depend upon everyone’s specific circumstances. We advise you to consult with a tax professional or speak with your relationship manager as soon as possible to discuss this new payroll tax, the implications of staying on or “opting out” of the state insurance program— and your options for private long-term care insurance.

For more information, consult with a tax professional or speak to your relationship manager about your options, contact The Private Bank or explore our wealth risk management services for a range of insurance solutions,  including policy review services.