New Long-Term Care Payroll Tax
Long-term care planning and the potential cost is high on the “worry list” for many as they age. Many will say to us, “I just don’t want to run out of money.” In that this is such a common concern, the State of Washington has approved legislation (we all voted on this in 2019) and we now have a state-sponsored Long Term Care (LTC) plan and a new payroll tax that will fund the program. It works like this.
The insurance will cover a beneficiary’s long-term care expenses up to $100 per day per beneficiary, for up to 365 days, with a lifetime cap of $36,500 (adjusted for WA CPI). Washingtonians who pay into the system for ten years and remain in Washington are eligible for this benefit. The benefit is triggered if you need assistance with three activities of daily living. Examples of these activities are bathing, dressing, walking, eating, taking medication and more. The benefits must be paid to an approved provider and include nursing facilities, residential settings like assisted living and adult family homes, professional caregiving like home health care, wheelchair ramps, emergency alert devices, medication reminders, training for family, Meals on Wheels, rides to doctor appointments, dementia education, caregiver support, care coordination.
Funding the Trust
The tax will be .58% of payroll or 58 cents per $100 of income with no cap on earnings. We’ve provided examples of how much would be deducted from your paycheck on an annual basis if you are subject to this tax. This payroll tax starts collecting in January 2022 and is scheduled to be paid entirely by the employee.
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The Act specifically allows individuals to opt-out of the program if they are self-employed or have an LTC insurance policy equal to or better than the state’s policy. If one wishes to apply for insurance, those policies must be active and in force by November 1st, 2021. The deadline for applying for the tax exemption is slated for December 31st, 2021. For higher wage earners, opting out and purchasing an individual policy will likely make sense. There are a few reasons why:
- People who don’t plan on living in Washington after retirement would not receive the benefit.
- People who plan to retire in less than ten years would not receive the benefit.
- The payroll tax could be redeployed to more competitive options in the open market by purchasing an individual LTC insurance policy.
- Recent advances in LTC policies now allow people to purchase a life insurance policy and access the death benefit early if they need long-term care.
- For example, a 50-year-old male in good health can obtain a $100,000 life insurance policy for $100/mo ($1,200/yr). A female would pay $83/mo ($1,000/yr)
- If long-term care is needed, benefits can be drawn down the death benefit at $4,000/mo for 25 months.
Let’s put it this way. A 50-year-old female who makes $200,000/yr would pay $1,160 per year in the new payroll tax. If they were to purchase a $100,000 Life Insurance policy with an LTC Rider for $1,000/yr, they would be ahead $160 each year assuming their income remains the same in the future.
When does opting out make sense for healthy individuals to purchase an LTC policy on the open market?
- The new tax is more than an LTC policy. The chart shows what income and what age it makes sense to purchase a policy.
- One is retiring in less than 10 years.
- If you want coverage outside of Washington.
- Those who don’t want to pay the payroll tax and like the idea of purchase LTC insurance coverage, even if it costs more.
We encourage all of our clients to have a plan for LTC. Whether that is self-funding a possible future LTC event, using insurance, relying on family members, or a combination of these options. If you have questions or if you would like to see how much it would cost to opt-out of the LTC Trust, please reach out to our team.
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