Do you work at Amazon, Microsoft, Facebook, F5 Networks, or any of the other large tech employers in Washington State? Do you earn over $300,000 a year? If so, read this!
Washington State passed a new tax on employees to fund the first public-operated, long-term care (LTC) insurance program. Effective January 1, 2022, Washingtonians who are W-2 employees will be subject to a 0.58% payroll tax on all compensation. Said differently: You will pay $580 of additional tax per every $100,000 of compensation with no income cap.
Good news: You can opt-out and become exempt from this tax and program by having your own individual long-term care insurance policy in place before the deadline. Apart from the annual savings, the benefits of an individual policy are far superior to those offered through the state’s LTC insurance program.
Q&A on Washington’s Long-Term Care Trust Act:
What is long-term care? What is long-term care insurance?
Long-term care includes services designed to meet a person’s health or personal needs as they age and need additional help completing their daily activities. This care is provided through three stages: independent living, assisted living, and skilled nursing.
Long-term care insurance provides the means to cover part or all of the costs for such services. This insurance coverage is essential for couples and individuals who do not have the personal financial resources to cover these costs.
Why is Washington state adding this program now?
Washington, like most states, has an aging population. Each year, more and more people over the age of 65 will need some sort of support service. By putting this program in place now, Washington hopes to mitigate part of this problem.
What benefits does this program provide?
Individuals can receive up to $100 per day to cover long-term care costs, with a maximum lifetime benefit of $36,500. This equates to a year’s worth of coverage for long-term care expenses at $100 per day.
- Benefits are not available outside of Washington State.
- Benefits only cover the employee who is contributing through payroll, not their spouse or dependents.
Who is subject to this new tax?
Starting January 1, 2022, all W-2 employees will be subject to this new payroll tax (unless you opt-out in time). This tax will be paid by employees through mandatory employer paycheck withholdings.
Self-employed individuals, such as independent contractors, sole proprietors, partners, and joint venturers, are not subject to this tax. They can, however, choose to opt-in to the program (similar to Washington’s paid family and medical leave program).
What do you mean by all employee compensation is subject to this tax?
This includes your salary, bonuses, and company stock (such as restricted stock units [RSUs]) with no income cap.
For example: An Amazon employee with an annual compensation of $450,000 ($160,000 salary plus $290,000 vesting RSUs) would pay an additional $2,610 in payroll taxes.
How can I opt-out and be exempt from this new payroll tax?
You can opt-out permanently if you have your own long-term care insurance policy in place before November 1 that provides equal or better benefits. You must then submit an attestation that you purchased this policy to Washington State’s Employment Security Department between October 1, 2021, and December 31, 2022.
Note: Individuals can also be exempt from this program if they have a qualified life insurance policy or annuity that includes supplemental coverage for long-term care expenses.
What are the differences in benefits if I get my own LTC insurance policy?
The benefits provided by an individual policy can be substantially greater and more comprehensive than those offered by the state’s program. One common difference is that individual LTC insurance policies provide coverage for two or more years. You can also purchase a shared policy with your spouse where you get a joint benefit and receive discounts on the premium.
Should I get my own LTC insurance policy?
We recommend exploring alternatives for any of the following reasons:
- High income earners: This means anyone who earns $300,000 or more in annual employee compensation. Most will be able to find a much better LTC insurance alternative for far less than $1,740 a year ($300,000 * 0.58% payroll tax). This is especially the case for households with two high incomes (i.e., $400,000 or more in joint employee compensation) that can purchase a shared policy to receive discounts on their insurance premiums.
- Plan to move outside of Washington State in retirement: You can only collect these benefits if you receive care in Washington State. Those who plan to move away will not receive any benefits and would receive far greater value by buying their own policy that can be used for LTC expenses in any state they choose to live in retirement.
- Plan to retire in the next few years: To be eligible, you must have paid into the system either (1) for 3 years within the past 6 years, or (2) for a total of 10 years, with at least 5 of those years paid without interruption. As such, you will not receive any benefits if you do not meet these requirements before leaving employment.
Please contact us if you have questions about how Washington’s Long-Term Care Trust Act might impact your financial situation.
Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Nothing in this presentation in intended to serve as personalized investment, tax, or insurance advice, as such advice depends on your individual facts and circumstances. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.