They arrived over the past month in the inboxes of Microsoft coders, Amazon copy editors, and Boeing engineers along with tens of thousands of other employees across Washington state: Emails from payroll departments or human resources telling staffers that they might have the option to opt-out of a new state payroll tax to fund long-term care.
To which many employees responded: “What in the world…?”
The reason for the email is a somewhat forgotten tax and program approved by the state legislature three years ago: The Washington Long-term Services and Supports Trust Act (LTSS). This year, the Act takes effect and includes a tax paid by employees — unless those workers get an approved long-term care plan elsewhere.
Needless to say, the announcement of a new payroll tax with a perplexing opt-out provision caught many people off-guard. “I think it was confusing for a lot of people,” said Travis Prescott, who works at Microsoft. “Even though the law was passed in 2019, I think that out-of-the-blue email was the first most of us had ever heard of it.”
So here’s your primer on what the law is, what it does, and what it means to opt-in or out. And we’ve included a bonus answer about a potential loophole.
What is this tax?
The tax is contained within the Long-Term Services and Supports Trust Act (LTSS). The first program of its type in the country, the LTSS was approved by the state legislature and governor in 2019. The act includes a .58% tax for every $100 from every paycheck and stock-based compensation. If you are making $100,000 annually, for example, it means an additional $580 dollars of payroll tax each year. Unless, of course, if you successfully opt-out of the tax (more on that in a bit). It is expected to partially fund long-term care for Washington residents who paid into the program and who are eligible.
Why fund long-term care?
To answer that you have to first look at the state’s Medicaid program. Think of Medicaid as a state arm of the massive federal Medicare program. Generally, Medicare is for people 65 and over, younger people with disabilities, and people who need dialysis. Medicare pays for many things but not long-term care. That comes from state-funded Medicaid.
With federal backing, state-run Medicaid manages and helps fund health insurance for everyone else enrolled who is not on private insurance. In Washington state, it’s called Apple Health. Most importantly for purposes here, Medicaid also is the program that provides long-term care for people who are eligible and can’t otherwise afford it.
Long-term care is massively expensive, especially for women as they tend to live longer than men. State budget analysts say the state won’t be able to afford the predicted need for long-term care. The new tax is both an effort to provide very limited long-term care and to help fund the overall Medicaid program.
OK. So should I opt-in or out?
Those are not the actual choices. Your actual choices are to opt-in the state tax or opt-in on a private plan because the state now requires some form of long-term care coverage (we’ll get to that loophole in a bit). Not many corporation-based private insurance plans offer long-term care coverage as part of an overall plan. The likelihood is that you don’t have long-term care through your workplace. But some employer-funded programs might meet the requirement for opting out. Check regardless.
If you are self-employed, you are exempt but can opt-in.
Which is the better deal?
It depends on what you want. If you are young, healthy, and simply looking to spend as little as possible and make less than $200,000 annually, the state tax likely is the way to go. If you make more than that, find a cheap, basic private plan and provide proof of coverage to your payroll department to bypass the tax. This is a general guideline but not an absolute rule as private, long-term care plans can be more expensive for women than men — sometimes 60% more pricey. If you want to know why, simply visit any nursing home, senior center, or long-term care facility. Look at the percentage of women to men. There’s your answer.
If you are in your mid-40s or older and are thinking about long-term care insurance that provides real coverage, it’s simple: get a private plan, get proof that you enrolled in a plan, and opt out of the tax. The cost of long-term care — particularly memory care — can be financially crushing, upwards of $8,000 monthly. A policy that provides some actual coverage will set you back between $2,000 and $3,000 annually.
Why not just go with the cheaper state coverage?
It’s very, very limited coverage. If you pay into the state program for the required minimum time — a decade of payments, generally — the maximum you will ever collect is $36,000. This is the total, not just the annual amount. For long-term care, it’s a drop in the bucket. Also, not everyone qualifies for state long-term care. You must meet the eligibility criteria from both a financial and health standpoint. In essence, you must not be able to care for yourself — feeding, bathing, etc. — and you must have exhausted most of your financial assets before the state will step in and help.
Plus, if you are not living in Washington state at the time you need long-term care, you can’t collect. Again, if you are in your 20s through 30s and making less than $200,000 annually — regardless of gender — sticking with the state tax can be a worthwhile option.
When do I have to make a decision?
Technically, you have until Nov. 1, 2021 to decide if you want to go private or simply accept the state tax. You don’t have to do anything if you want to accept the state tax, and your employer will collect it. But if you want a private policy, remember that getting one isn’t an immediate process. Your potential insurer will screen you to determine your rate, then bill you, and then provide the required proof of coverage. That takes time. Experts suggest making a decision by late July or early August. But while you must make your decision by Nov. 1, you don’t have to provide proof until the end of December. So you have a small grace period.
Now, about that loophole…
Right. So among the vague provisions in the LTSS is the proof of insurance that is required to bypass the state tax. While you need to provide it, there is no clear requirement that you need to provide it each year, according to an analysis by the law firm Davis Wright Tremaine. This means you could get a policy for one year, decline renewal, and remain outside of the tax as long as you stay with the same employer. However, if you are not paying the tax, you will never be able to receive its benefits.
If you need more help or want additional details, here are some explainers:
And here’s a handy guide, put together by Brooks, that runs through public vs. private plan comparisons (click to enlarge):