September 9, 2021
Many employers in Washington and Oregon are just now learning about Washington’s new long-term care payroll tax. Managing COVID, labor shortages, and a mountain of work has taken priority for many months, but Washington’s newest payroll tax begins in just one more quarter, starting January 1, 2022. If you have employees who live or perform any work or remote work in Washington state, here is what you need to know.
What is the “Long Term Care Insurance Program,” and why is this tax being collected?
The Washington Legislature passed House Bill 1323 on April 27, 2021, establishing the new long-term care payroll tax. The bill amended RCW 50B.04 to create the country’s first state-run long-term care trust fund. The payroll tax is intended to alleviate some financial pressure on the federal- and state-tax-supported Medicaid system, which is being used for long-term care, among other uses. In addition, the payroll tax will support a fund to provide some long-term care payments under the long-term care (LTC) insurance program, which can begin being used on or after January 1, 2025.
There are significant restrictions on who can use the funds. To be eligible, an individual must have paid into the LTC insurance program either (a) for three years within the past six years from the date the benefits application is made; or (b) for a total of 10 years, with at least five of those years paid without interruption AND the individual worked at least 500 hours during each of the years in the applicable three- or ten-year timeframe. For persons planning to retire in the next three years, the LTC insurance program will not be available. For any person who works in Washington but then moves out of state without paying the payroll tax for at least five consecutive years, the LTC insurance program will not be available unless the person moves back to Washington and works for another five consecutive years. For retirees who otherwise would qualify but move out of state at any point (e.g., to move in with a relative or live in a warmer climate or less-expensive state), the LTC insurance program will no longer be available because it is only available to residents.
The benefits available in the LTC insurance program are limited. 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 one year’s worth of coverage for long-term care expenses at $100 per day. There is currently no inflation adjustment built into the benefits limits. Benefits are not available outside of Washington state, meaning if you pay the LTC payroll tax but move outside Washington state, you cannot use the program’s benefits. Additionally, benefits only cover the tax-contributing employee’s long-term care, not long-term care for a spouse or dependents.
When does this new payroll tax begin?
Employers must begin collecting the payroll tax on January 1, 2022, and pay it quarterly to Washington’s Employment Security Department.
How much is the tax, who collects it, and who pays it to where?
Washington’s new long-term care payroll tax is only on employee wages and income; it is not an employer-matched tax. Employers are required to collect the tax and pay it as with other state payroll taxes in Washington state. The tax rate is 0.58% or 0.0058 on each employee’s wages and income. If employers are based in Oregon or other states but have employees in Washington state for whom the payroll tax applies, the employer will need to set up an employer account with Washington’s Employment Security Department to pay the payroll taxes quarterly. See wacaresfund.wa.gov for details on employer payments.
Who pays the tax, and does the tax apply only to wages or to all income?
All W-2 employees are subject to the tax, essentially the same people subject to Washington’s Paid Family & Medical Leave Program. The payroll tax applies to all compensation of all W-2 employees, including wages, bonuses, paid time off, severance pay, and stock options. Also, there is no cap on the income level for the payroll tax. In other words, a person earning $250,000 per year pays the 0.58% payroll tax on all $250,000 of compensation (for earnings of $250,000, the annual tax is $1,450). For high earners, note that the current maximum lifetime benefit for anyone using long-term care trust funds is just $36,500 if the person qualifies to use the funds.
I have some Oregon and some Washington employees; which of my employees does the tax apply to?
The statutes directly relating to Washington’s long-term care tax are at RCW 50B.04. The definition of “employment” in RCW 50B.04.010 adopts the definition from RCW 50A.05.010(8)(a), which defines “employment” to include any personal services (for wages, under contract, etc.) if: (i) the service is localized in Washington state; or (ii) if the service is not localized in ANY state but some service is performed in Washington state, and the base of the employer’s operations are in Washington state, OR if the employer has no base of operations in any state [e.g., foreign company] then if the employee’s services are directed or controlled from Washington state, OR if the employee’s services are not directed or controlled from any state, then if the employee lives in Washington state.
The term “localized in this state” or “localized in Washington state” is defined in RCW 50.04.120 to mean: (1) if the employee’s service is performed entirely within the state; or (2) if the employee’s service is performed some in Washington state and some outside Washington state but that portion of the work performed outside Washington state is merely temporary or involves isolated transactions outside Washington state.
For Oregon-based employers with Washington-based employees or employees working remotely in Washington, contact Bullard Law for assistance in determining whether the payroll tax applies. Similarly, for Washington-based employers with some out-of-state employees or out-of-state remote employees, contact Bullard Law for assistance.
Are any people exempt from the tax?
Self-employed individuals, independent contractors, sole proprietors, partners, joint venturers, federally recognized tribal employees, and federal government employees are not subject to the tax during the time the individuals are in these positions. Self-employed individuals, sole proprietors, and others can opt into the LTC program if they so choose and pay the same payroll tax rate as other employees. Learn more here.
Employees who already have long-term care insurance equal to or better than the LTC program, and meeting certain Insurance Commissioner requirements, can request an exemption from the payroll tax with proof of adequate insurance. Employees can only be exempted if they are age 18 or older and complete an application for exemption based on the existence of better individual or group insurance that is submitted to and approved by the Employment Security Department (ESD) between October 1, 2021, and December 31, 2022, based on coverage that is in existence by November 1, 2021. If the ESD approves the application, the exempted employee must submit written notification to the employer, and the employer must retain the notice in its employee personnel files. Employers must collect the payroll tax unless and until an exempt employee provides the ESD approval letter to their employer. An exempt employee is not entitled to a refund of any taxes collected before the employer receives the ESD approval letter. Therefore, employers must be sure to promptly stop collecting the payroll tax upon receipt of an employee’s ESD approval letter. Exemptions from the payroll tax must be obtained by application made between October 1, 2021, and December 31, 2022, and must be approved before the payroll tax collection ends.
Employees subject to a collective bargaining agreement in existence as of October 19, 2017, that does not provide for payment of the payroll tax also are exempted, but only until the collective bargaining agreement is reopened, renegotiated, or expires.
Once exempted, employees cannot ever opt back into the state program – the opt-out is permanent. If a person is exempt, the state’s long-term care insurance program will not be available, and benefits cannot be obtained from the fund.
The content of this Alert is provided for general information purposes only. It should not be considered legal advice or used as a substitute for consulting an attorney for legal advice.