Soaring prescription drug costs are a key driver of rising healthcare premiums for both employers…
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 $36,500 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 LTC Act tax:
- 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 employers’ operating costs. By offering LTC insurance 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 importantly, 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. Of the groups who have already applied for a “group LTC plan,” 80% have been rejected or not made it through the initial application process.
The procurement of an LTC 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.
- Make available to employees an insurance broker that 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 legislature. 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. Our sources 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: Lawmakers 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 as it stands today will not go into effect.
As noted above, both options are not great and have a high potential to cause more harm and administrative burden to employers and employees.
Most importantly, there is a material likelihood that the LTSS tax will never go into effect because of the inherent challenges wrought with this law.
Need help, or want to discuss this issue further? We are here to help. Contact Mike Monroe.
Why is the LTC Act being proposed?
- Washington State can’t afford its current Medicare/Medicaid program
- Additional tax is needed to supplement the care costs of the state’s senior/elderly population
- It will make funds available for family members caring for elderly population
What is the LTC Act?
- A payroll tax to fund senior/elderly care needs
- A first-of-its-kind program in the nation
- Signed into law by Governor Jay Inslee (HB 1323) on 07/28/19
- Only WA residents qualify for benefits
- To qualify for permanent benefits, employees must work 500 hours for 10 years
- Up to $36,000 in lifetime benefits for each qualifying individual
- Proposed start date for first payroll deductions for LTSS tax is Jan. 1, 2022
- Funded through a .58% payroll tax on wages
- Burden is on employer to collect LTSS tax
- Proposed benefits will first be paid out on Jan. 1, 2025
- Limited to $100 per day
- Care issues (Activities of Daily Living) that qualify (must have three of the following):
- Medication management, personal hygiene, eating, toileting, bathing, ambulance, dressing and cognitive Impairment
- Providers that qualify for payment
- Family members (if they complete 21-35 hours of training)
- Nursing facilities, professional caregivers, driving services, care coordination providers, wheelchair ramp installers, care educators
- Employees must pay through a payroll tax unless they opt out
- Employees must sign attestation agreement available on WA state website declaring they opt out
- Employees who opt out must have a long-term care insurance policy with a private carrier
- Statute somewhat addresses if employers can opt out as a collections agent
- Must provide similar or better “long-term care insurance” coverage through a private carrier
- Carriers are currently evaluating whether they want to offer group underwritten policies to cover this care. Right now, there are essentially no options for employers to purchase a group underwritten guaranteed issue long-term care policy.
Primary Issues for Employers and Employees
- Places additional administrative burden on employers to collect and remit LTSS tax
- This tax adversely impacts high wage earners (over 100k) — they keep paying into the program but their benefits cap out at 100k per year
- 75% of the professional wage-paying base in WA can receive comparable or better coverages through private insurance
- The benefit isn’t portable — beneficiaries must remain in Washington to collect
- Increases cost of living for WA working professionals
- The maximum lifetime benefits available per individual of $36,000 does not make a significant impact on the cost of care needs for most
- High administrative cost for State of WA to run program, administer benefits, develop training program, train family members, and monitor abusers
- May not be able to offset Medicare program shortfall/funding deficiencies
- Trust act itself (HB1323) has ambiguity around terms, definitions, transition and effective dates