Nearly two years ago, we published a piece on a newly passed piece of legislation here in Washington called the “Long-term Care Trust Act” (now called the “WA Cares Fund”). I am sure you all remember it fondly 😊. Kidding aside, it did somehow turn into a top-20 search hit on Google for those looking to learn more. Why was this? Was it because the piece was so well-written? I’d like to think so, but more likely it was because there is just so little info out there on what amounts to a very significant new law.
This new law goes into effect on January 1, 2022 – which is now just over seven months away. When it does, many of you will find 0.58% of your paycheck suddenly going to the state rather than your bank account. Put another way, $580 for every $100,000 of income will no longer be yours. If you’re like me, that catches your attention and makes you ask some questions:
- Does this really apply to me?
- What benefit do I get in exchange?
- Is there a way to avoid this if I want to?
Let’s take a quick look at the answers to all three questions (and then two more). Note that while the July 2019 piece hit on the major items and most are still applicable, there have been some minor changes since the law was passed, so we’ll pay particular attention to those changes.
Does this really apply to me?
If you are a W2 wage earner in the state of Washington, this new tax applies to you (even Oregon and Idaho residents crossing the state line to work in WA will be taxed, even though they are ineligible for benefits unless they move to WA later on!). Self-employed individuals (including 1099 contractors) are exempt, but can choose to opt-in. If you are already retired, you don’t have to pay in – and you also are ineligible for benefits anytime in the future. If you do not work outside the home, you will not be eligible.
What benefit do I get in exchange?
The benefits have not evolved from what we discussed back in 2019. As a refresher, qualified individuals will receive 365 benefit units currently equal to $100/unit. This translates to a lifetime benefit of $36,500, a number that will be indexed to inflation. Please read our earlier post to learn more about what types of expenses qualify for coverage.
To become a “qualified individual,” you must work a minimum of 500 hrs/yr (25% of full-time) and pay premiums for at least 10 years (without a break of 5 consecutive years) or for 3 within the last 6 years (from the date of application for benefits). Under the former (10 years), you can permanently vest – meaning the benefit will always be there for you. However, under the latter (3 of 6), you will vest on a temporary basis and can “un-vest.”
Those reading carefully here may notice that if you are within 10 years of retirement, this may not work out very well for you! While you may be able get some benefit under the “3 of 6” rule, you will never permanently vest. In other words, you may benefit if you have qualifying needs shortly after retirement, but you will get nothing if those needs are later in life.
Is there a way to avoid this?
Yes!...but you have to act soon. You can request an exemption from this tax if you own a qualifying long-term care insurance (LTCi) policy. You must have this policy in place by November 1, 2021. You can apply for this waiver between October 1, 2021 – December 31, 2022. The tax will apply until the waiver is approved.
Please don’t wait until October to start the application process for your new policy. Credible rumors have it that insurers are already backed up trying to process the huge influx in applications, and that some are not even taking new applications at this point.
One question that has been unclear is what constitutes sufficient coverage to receive this waiver. Turns out the law does not specify other than to say LTC insurance “as defined by RCW 48.83.020” and the Employment Security Department (ESD) has reportedly stated “there is no minimum requirement of coverage” for private LTCi policies. Our interpretation of all of this is that if you have a policy that is of equal or greater value to the benefit provided under this Act ($36,500), your waiver request will be approved. After all, the original intent of this law was reportedly to help reduce the strain that uncovered long-term care costs was putting on the State’s coffers. In reality, you’ll be hard-pressed to find a carrier that offers coverage of <$100,000 – so any policy should be sufficient, including hybrid life insurance / long term care policies.
As we conclude, let’s now answer two final questions:
- When does a waiver make sense?
- When is it advantageous to just pay the tax?
When does a waiver make sense?
At its most basic level, a waiver makes sense if the cost of the qualifying policy is less than what you would pay in taxes each year. For example, if you are making $250,000 (of W2 income), you are going to pay $1,450 each year in taxes. If you can get a policy that costs less than this, you probably should.
However, there are other circumstances where you will also want to say yes to a private policy – even if it costs you more each year. Here are some examples that come to mind:
- You want your benefit to be portable, meaning you want to have the flexibility of living anywhere in retirement. Under this Act, you can only receive benefits if you are living here in Washington when the need for benefits ensues. Private policies are ambivalent as to where you call home.
- You are within 10 years of retirement. As mentioned above, you will not be able to permanently vest into this program if you retire <10 years after the tax collection commences. You stand a chance of paying taxes for many years with no benefit on the other side. With a private policy, you would at least get something in exchange for your outlays.
- You expect to make significantly more income annually in the future. As it stands right now, this waiver period is a one-time event. You may have a limited income now and it might pencil out to just pay the tax. However, if you expect your income to grow substantially in future years, you could later find yourself paying very substantial taxes that you would have preferred to opt out of when the opportunity was there.
- You have significant concerns about long-term care costs. The reality is that $36,500 will not go far if you have true long-term care needs. For some, family medical history, their own medical history, or their own financial and familial circumstances may put them at a higher risk of needing expensive care later in life and being unable to finance it. A private policy can provide much greater benefits, though we will caution that the very medical history that has you concerned could be the same one that disqualifies you from getting approved for a private policy.
Just pay the tax?
This leads us to answering that second question, “When is it advantageous to just pay the tax?”
- If you have underlying medical concerns that mean the underwriter will not approve you for a private policy, this public option may be your only option. The public option is “guaranteed issue,” meaning you don’t have to go through underwriting. You automatically qualify, regardless of your health history.
- If you have a low to modest income, where 0.58% of your income does not equate to a large tax bill. In this case, the public option may prove to be a cheap policy – and you may even opt for it if you already have private coverage. For example, if you’re working part-time and making $20,000 a year, you would only be paying $116/yr for this coverage.
- You’re a Washington lifer! If you are set of staying here in the Evergreen State until you die, the lack of portability is not a concern for you!
I know this is getting long, so we’ll just hit on one more topic before we wrap it up. Getting back to the topic of the waiver, you may be asking if this is permanent and whether you have to continually certify that you are maintaining the private policy in good standing. Regarding permanency, yes – opting out is an irrevocable and permanent decision. This means you will want to take great care in making this decision. While a private policy and no taxes might feel attractive now, perhaps it won’t be the right solution for you long-term. Regarding maintaining that policy in good standing, herein lies a major loophole. The reality is that there is currently nothing in the law that prevents you from obtaining the waiver and then dropping your policy. However, if we have observed this loophole, you can be assured the lawmakers have as well, and you could run the risk of them closing this and implementing an annual certification process in the future.
In conclusion, we hope this has been informative and helpful as you look ahead. The decisions here are not easy, but decisions do have to be made. If you think the waiver is the route you want to take and you do not already have a private policy in place, we encourage you to start now with exploring that option. In the interest of brevity (and your sanity), we have not gone into details of coverage types and costs, but we welcome questions about those if you need guidance. You’ll need to find out costs that apply to you and whether you are likely to qualify for coverage. If you are and the costs are reasonable, you will need to get your application started soon to ensure everything is in place by the November 1st deadline (starting by June is prudent). If you are a business owner, you should start educating your employees now on what’s coming their way in a few short months. If you have questions along the way, please do not hesitate to reach out. We are always here and happy to help.