You may have heard about a new insurance bill recently passed by the Washington state legislature, the Washington State Long Term Care Act (“the Act”).
This program is the first of its kind state-sponsored long-term care program and was passed to help mitigate cost pressures on the State for providing health care services to the elderly. The tax to fund this program goes into effect on January 1, 2022 and will be levied at a rate of 0.58% on all W-2 compensation with no income cap. Self-employed individuals are exempt from the tax until January 1, 2025.
The benefit for eligible individuals will be $100 per day for a maximum of 365 days, or $36,500 total. There are strict eligibility requirements pertaining to years of payment of the tax. One can opt out of this tax by purchasing his/her own long-term care (LTC) policy with the same or higher level of benefit. If one leaves or retires out of the state, an otherwise eligible person would lose the benefit entirely. And the benefit only applies to the W-2 employee, it cannot be transferred to a spouse.
This tax has financial planning implications for many individuals, and income levels could have a significant bearing on one’s decision to opt out. Relatively speaking, the program will most benefit people that have lower financial resources in retirement.
For younger individuals who will be contributing to the program for potentially decades, it may make sense to opt out and purchase a long-term care policy while they are young and when a LTC policy is less expensive. A LTC policy would also be portable if they leave the state. The same applies to high income earners: while a $218 per month tax for someone making $450,000 a year may appear low relative to their income, financially it would probably be more advantageous to purchase a long-term care policy that is both portable and has better benefits, in other words, more return for dollars spent. We believe a future increase in the tax would only serve to further reinforce the motivation for younger and higher income workers to opt out.
What happens next? We believe the Act may very well face legal challenges. The legal debate could center around the definition of a “medical benefit” or “employer plan”, exemption as a payroll practice, and also legal jurisdiction. Richard Birmingham of the law firm Davis Wright Tremaine recently penned an analysis of the legal aspects of the Act. His analysis suggests that the Act (and its benefits) could fall under the purview of ERISA statues and that under ERISA, a LTC plan (such as the Act) may be legally defined as both a “benefit” and an employer established plan.
This interpretation may support the legal argument that this benefit is preempted by ERISA and therefore raises a question about the Act’s legal or operational standing. There would appear to be time for a court challenge as the tax does not go into effect until Jan 1, 2022.
Robert Toomey, CFA/CFP, is Vice President of Research for S. R. Schill & Associates on Mercer Island.