How to opt out of the Washington State Cares fund for Long-Term Care insurance, and what it’s all about

*** If you just want to know how to opt out, skip down to here.***

Washington state recently passed a law to charge employees a payroll tax of 0.58% on their earnings. That tax will pay for a maximum lifetime benefit (NOT per year!) of $36,500 that people still living in Washington state can use towards long-term care services such as in-home help or a nursing/assisted living home.

This is a pretty small drop in the bucket towards long-term care costs for those that end up needing them, so as a financial advisor I would say it really doesn’t change the math at all when deciding whether you should purchase a (private) long-term care insurance policy.

How you become eligible for benefits

Employees that pay in for at least 10 years become eligible, as do those who worked at least 500 hours per year in three out of the last six years before they claim the benefits. Keep in mind that you’d have to actually be receiving your care in Washington state to get any benefit out of it…

Can I opt out?

By default, the tax only applies to employees unless you opt-in as a self-employed person. Employees can only opt out one-time if they purchase private Long-Term Care (LTC) insurance by November 1st 2021.

Per this:

Individuals who have private long-term care insurance may opt-out: Any employee who attests that they have comparable long-term care insurance purchased before November 1, 2021, may apply to ESD for an exemption from the premium assessment. The employee must provide proof of their ESD exemption to their employer before the employer can waive collecting the premium assessment from the employee’s wages. The employee must apply for the opt-out exemption to ESD between October 1, 2021, through December 31, 2022.

How to opt out for employees

Word on the street is that this is next to impossible to do on your own because Washington state private LTC providers have stopped issuing new policies (you’re welcome to try though.)

However, there’s an easy loophole that will work for many people: employers (Amazon, Apple, Boeing, for example) are providing LTC policies for their employees to purchase. It appears you have to keep your private LTC policy through all of 2022 to secure the exemption, but I’m not 100% on this. Worst-case you’ll pay at least 1 years-worth of premiums, but if you’re relatively young and/or in a high income bracket, it is almost certainly beneficial for you to opt out and take this premium hit!

Check with your employer and then enroll ASAP in their LTC policy to make the Nov 1st 2021 cut off for enrollment. THEN, starting on Oct 1st, 2021 (or after until Dec 31st 2022, apparently), you can file for an exemption with the state. Once you get your exemption letter, you must present it to your employer to avoid paying the 0.58% payroll tax that will start January 1st 2022.

After you get your exemption letter, or perhaps after the year 2022 ends, you can cancel your LTC coverage through your employer. (I assume it’s always possible to cancel at the end of a year, or at least whenever you have open enrollment for benefits, but just check with your HR folks to make sure.)

So, get on it and opt out and save yourself a career’s-worth of 0.58% taxes. If you make $100,000 a year, that’s $580/year for the rest of your career (more if your income goes up over time.)

It’s always possible that in the face of a wave of high income people opting out, the state may be forced to retreat and repeal the tax, but that feels like a long-shot, and there’s no guarantee of that. Even just 2 years or so of avoiding the tax will likely make you break even on the employer premiums you pay, depending on your income and what your employer’s LTC costs.

One person I know at Apple paid an annual premium of $1,200 for an LTC policy covering both him AND his wife– check for spousal coverage so that your spouse can opt out too if their employer doesn’t offer LTC coverage– so it was well worth it for them.

What about the self-employed?

Self-employed individuals can decide to opt-in to the tax and benefits. I am self-employed and I do not recommend opting in unless your lifetime earnings under the opt-in are expected to be pretty low. How low, you ask? Well, let’s do some math.

The benefit is $36,500 total in today’s dollars, and the tax is 0.58% of your total self-employed earnings (the state collects it on both any wages you pay yourself as well as your net business earnings.)

Based on my math, if you expect to work until you’re 60, expect to earn 5% after inflation on your investments, and have a 52% chance of using the LTC benefit with an average age of starting benefits at age 85 (I grabbed those assumptions from here), the break-even decision point is an annual income of:

  • $90,000 if you’re 50 years old and work at least 10 years
  • $36,000 if you’re 40 years old and work at least 20 years
  • $18,000 if you’re 30 years old and work at least 30 years.

If you make more/work longer/are younger than any of these scenarios, you’re better off not opting in and simply investing that 0.58% of your income into a long-term investment account, like an IRA/401k. The math applies to employees as well who are considering whether to opt out, but again, they can only do so if they’ve already purchased (expen$ive!) LTC insurance privately.

Lastly, this assumes you stay in Washington state. If you think there’s a good chance you won’t retire here, then you should also NOT opt in.

Author: Ward Williams

Ward is an independent financial advisor at Better Tomorrow Financial. He started working as an independent investment advisor in 2009.

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