As you may may have heard, Washington State is implementing a new payroll tax starting January 1, 2022. But it’s not a tax you’re stuck with, and you can opt out if you meet the requirements by October 31 of this year. This opt-out option is a government blue light special, so if you miss the opt-out window, you’re likely stuck paying the tax forever.
About Washington’s New Long Term Care Tax
First, a few highlights of the new tax. The tax is paid out of employee earnings, so it doesn’t cost employers anything. (Unless you’re running your own payroll, in which case you may want to consider an awesome payroll provider like Gusto (referral link) that will handle all the tax tracking and remittance paperwork and payments for you.)
For employees, they’re going to pay 58 cents out of every $100 they make. Many people think this will go up once people start to become eligible for benefits in 2025, but since we’re not fortune-tellers, we have no opinion on the matter. The “employees” required to pay the tax include everyone on payroll, including business owners who receive any payments reported on a W2.
The insurance itself provides a maximum lifetime benefit of $36,500. To put that in perspective, annual (not lifetime) long-term care to runs anywhere from $33K/year to $131K/year (source: Washington DSHS). To qualify, a recipient must have paid into the system long enough, and be a Washington resident at the time they seek to receive benefits.
How Can I Opt Out?
The requirements of opting out seem fairly simple, although you’ll need to work with a qualified insurance agent to confirm all the details. But in short, you can opt out of the tax if you: (1) purchase “comparable” long-term care (“LTC”) insurance by October 31, 2021; and (2) apply for the opt-out between October 1 and December 31, 2021. Of course, “comparable” is the trick, and that’s where the experienced insurance agent is invaluable.
Why Opt Out?
We’ve spoken with a lot of employees, including owner-employees, who want to opt out of paying this tax. There are a lot of good reasons for doing so, which may or may not apply to you, and include:
- Sticking it to the Man. The reasoning here is, taxes suck; if I can opt out of a tax, why wouldn’t I? (We’re not saying this is a good reason, but this is definitely one of the reasons we’ve worked with, for better or worse.)
- You Already Have LTC Coverage Anyway. You might have other coverage in the form of a standalone policy, or a rider on your life insurance policy, or another policy you already have. Regardless, if you already have qualifying LTC insurance, there may not be a good reason for you to pay into the state system for their coverage.
- Income Levels and Financial Planning. At a certain income and savings level, some people are likely to save money by purchasing a private plan and opting out of the state’s plan. Talk to your financial advisor to see if that might be you.
- Taxes May Go Up. If the tax rate increases when benefits become payable in 2025, there will be no way out for those who don’t want to pay the increase. And, if the tax does increase, it could make the state’s coverage more expensive than private coverage. So, investing in the private plan and opting out now may save money down the road.
- You Want To Move Out Of WA. If you pay into the system – no matter for how many years – you’re only eligible to receive benefits while you’re a Washington resident. So, if you’re thinking you might not want to be a WA resident at some point in the future, you may run the math and realize that paying for the private plan you can take with you is a better investment.
- You Don’t Even Live in WA. Again, the benefits of the plan only apply to Washington residents. But what if you live in Idaho or Oregon (or another state) and just work in Washington? Well, you’ll be paying into a system from which you can never benefit.
- You Want Better Coverage. The lifetime limit on the WA plan is $36,500. As mentioned above, WA estimates that annual LTC expenses start at $33K per year. So, some employees may opt for a private plan to get better coverage or higher limits.
- You’re Financially Resourceful. Some investment vehicles include qualifying LTC coverage among their benefits. Permanent life insurance is one example of an investment tool that could provide qualifying LTC coverage. If you’d rather invest your money than pay it as a tax, that may be a reason to opt out.
- You Talked To Your CPA Or Financial Advisor. Your CPA and financial advisor may have other recommendations for you as to why your situation may weigh in favor of opting out or not.
It’s now or never. The opt-out option is a one-time deal that expires soon. If you don’t place qualifying coverage by October 31, and file your opt-out application by December 31, you’re stuck paying the tax forever.
Why Not Opt Out?
The biggest risk of opting out is that it’s permanent. If you do opt out, you will never, ever, ever have the opportunity to opt back in. Ever. (Even if you lose the coverage you bought to qualify for the opt-out in the first place.)
Another reason you may choose not to opt out is because you’re willing to pay the premium – 58 cents for every $100 earned – to get the protection of the state’s insurance. And you may choose to do that despite risks that the premium (ie, the tax) might increase in a few years, because even the state’s higher premiums might cost you less than a private policy.
I Think I’d Like To Opt Out – What Do I Do Next?
If you’d like to talk to someone about private insurance options that will allow you to opt out of the tax, talk to your insurance advisor. Or, if you’d like a referral, consider connecting with Madison Tebow at Coho Financial, who we’ve worked with on various projects in the past.
You can read more about the tax here: https://www.wsha.org/articles/new-state-employee-payroll-tax-law-for-long-term-care-benefits/