Long-term care can be an incredibly expensive part of aging that all families will need to plan for at some point. The state of Washington recently established a law that aims to assist residents in the burden of paying for long term care later in life.
What is the WA Cares Fund?
Also known as the Washington Long-Term Care (“LTC”) Trust Act, the goal of this law is to provide long term care insurance to qualified Washington residents. The state benefits will pay a maximum of $36,500 at $100 per day, with a maximum benefit period of a year. This amount will also be adjusted for inflation annually.
Washington will raise the revenue for this benefit by taxing W-2 earning employees with a payroll deduction of 0.58% for each $100 earned beginning January 1st, 2022.
This 0.58% tax is applicable to all employee compensation with no income cap. So even if you receive compensation in the form of company stock, you will still be taxed at this rate. For example, an employee with $100,000 per year in W-2 income would pay $580 in taxes.
There are a few types of workers that are excluded from the tax:
- Self-employed individuals
- Independent contractors
- Federally recognized tribal employees
- Federal government employees
In order to qualify for LTC benefits broadly, you must need assistance with three of the following activities of daily living:
- Medication Management
- Personal Hygiene
- Cognitive Functioning
- Transfer Assistance
- Body Care
The WA Cares fund has further requirements to access the funds from the state plan. They are accepting the first applications in January 2025 for qualified beneficiaries. After that point, you must have worked and paid the applicable tax for:
- At least 10 years at any point in your life without a break of five or more years, or
- Three of the last six years at the time you apply for the benefit, and
- At least 500 hours per year during those years.
How long does $36,500 in benefits last?
Even if coverage is applicable to you, the $36,500 benefit may not cover a long term care facility for the duration of your stay. Genworth has a useful tool for finding the potential cost of health care in your specific area.
The chart below shows their estimated costs for various services in the Seattle area.
Morningstar estimates the average duration that women need long-term care services to be 2.5 years, and 1.5 years for men.
Is there any way to avoid this tax?
Covered individuals can avoid this tax by having a LTC plan through their employer which is of equal or better coverage benefits to the state plan.
You can also claim an exemption to the plan by having a private LTC insurance plan in place that has equal or better benefits than the state plan. You will need to complete an application through the Employment Security Department and have a policy in place by November 1st, 2021.
Reasons to opt out:
High income earners: because there is no income cap on the payroll tax, most high-income earners can obtain private LTC coverage at a lower premium with better benefits.
If retiring outside of WA: you cannot collect these benefits if you plan to move away in retirement. Buying your own LTC policy would be more beneficial because you can receive care in any state.
If retiring soon: If you fail to meet these requirements to receive benefits noted above, you will not receive any benefits.
Who should I discuss this with?
Most employers are at least considering group LTC plans for their employees. Your human resources department should be well versed in understanding how this law will affect their employees. They should be your first point of contact to ask questions regarding the LTC Trust Act.
Reach out to your financial advisor to understand the benefits of LTC coverage. They can then put you in contact with an insurance representative to facilitate an application if needed. An insurance expert can help to provide the appropriate coverage necessary to apply for an exemption. However, you could also consider further coverage as a planning technique to mitigate financial risk later in life.
Acting soon is of critical importance. Most insurance providers are inundated with requests for policies. A LTC policy can take a few weeks to underwrite under normal circumstances. If you are pursuing an exemption, some insurance companies recommend having an application submitted by mid-August.
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