In 2019, Washington became the first state in the nation to create a public, state-run long-term care insurance program. Under the Long-Term Care (LTC) Act, a payroll tax will be used to finance a long-term care benefit for Washington residents.
The law’s purpose is twofold: to offset state Medicare/Medicaid costs associated with long-term care, and help Washingtonians afford the high cost of care from in-home assisted living to extended nursing home stays.
The LTC Act is currently set to become effective on Jan. 1, 2022. At that time, it will impose a mandatory payroll tax on all employee compensation — including company stock. Workers will pay $0.58 for every $100 earned, with no wage cap. To be eligible for the benefit, an individual must have paid premiums either:
For three of the past six years from the date the application for benefits was made
For a total of 10 years, with at least five consecutive years of uninterrupted payments
For a year to count, an individual must have worked 500 hours during that year to access the benefit. No LTC benefits are payable until 2025, and the payable benefits max out at $100 per day and $36,5000 lifetime (in today’s dollars).
Only those who live in Washington, opt in and meet the vesting requirements above will be eligible to receive long-term care benefits.
Employees can opt out of the state-run long-term care benefits and pay for their own long-term care insurance. Doing so also allows them to apply for an exemption from the tax for the first year. Under Substitute House Bill 1323, which amends the LTC Act in an effort to limit the number of workers who opt out, exemptions would only be considered for individuals who buy a qualifying long-term care policy before July 2021. This opt out provision was recently extended to November 2021. Timing to take advantage of this extension is still unclear.
From an employee perspective, there are a number of reasons why employees would want to opt out of the state-mandated LTC benefit, not the least of which is that the new payroll tax will impact their pay.
Here are some others:
● The benefit isn’t portable, so anyone who plans to move out of Washington in retirement won’t receive it, despite paying into it, potentially for years.
● Long-term care insurers have stipulated that workers who plan to retire in the next 10 years won’t receive the benefit due to certain eligibility requirements.
● Opting out and paying for a private, individual LTC policy may make better sense financially for workers at certain income levels.
So… What should employers do?
The short answer …. nothing.
The longer answer….
Employers essentially have two options to support their employees through this newly proposed LTCA tax
1) Purchase a group long term care policy on behalf of employees
There are two major drawbacks to this option. The first is that it will increase the operating cost of the employer. By offering this as a benefit in lieu of what the employee would have to pay, the employer is shifting the cost burden away from the employee. This is nice for the employee but more expensive for the employer.
More important. there are few if any carriers that underwrite group LTC policies. Long term care has traditionally been underwritten at an individual level and the underwriting process has been somewhat exhaustive for the applicant.
In our research, we found no carriers willing to underwrite a guaranteed issue group long term care policy. What we did find is that a very small group of carriers is willing to offer a “group” solution, but the actual underwriting process will still be done on an individual basis. We have also learned that the carriers offering these solutions have created significant barriers in the application process. 80% of the groups who have already applied for a “group LTC plan” have been rejected or not made it through the initial application process.
The procurement of this benefit is difficult, time consuming and costly. From an employer’s perspective, it is simply much easier to be a collection agent for the program than to pursue this alternative
2) Make available an insurance broker to employees who has the specialty and expertise to curate LTC policies
This is a more reasonable option as it shifts the work from the employer to a third-party expert who understands the nuisances of procuring long term care insurance.
The major drawback of this approach is that employees may not need to actually get long-term care insurance.
This law has had significant challenges since it was first proposed by the Washington State legislator. It was repealed through an advisory vote of the people (even though those advisory votes don’t really matter) and does not have majority support from either the employer or employee communities.
The LTSS tax is the first of its kind in the nation and there are no other proven models for funding long term care through an employer mechanism. This became extremely clear in our research as no carriers in the private markets currently underwrite these programs at a group level.
The initial opt-out implementation timeline for employees was July 2021 but that was recently extended to November 2021. Sources that we have that are close to this predict that the opt out timeline will be extended into 2022 when the law is supposed to go into effect.
Bottom line.. law makers created and approved a law that is vague, hard to implement and doesn’t provide our citizens with good choices. Until dynamics in the private carrier markets or the bill is substantially revised, it is our prediction that the law is stands today will not go into effect.