Washington state recently passed the Long-Term Care Act, creating a new employee payroll tax of 0.58% on employee income. SB 1323 was signed into law late last month, and it amends RCW 50B.04 to create the country’s first state-run long-term care trust fund. Employers must begin collecting the tax on January 1, 2022, on all compensation of all W-2 employees, including wages, bonuses, paid time off, severance pay, and stock options. 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. The employee payroll tax is not matched by employers, but employers must collect and remit the tax quarterly as with other state payroll taxes.
Oregon employers with Washington-based workers may also be required to collect and remit the payroll tax. Although rules are still being written, the tax applies to W-2 wage earners localized in Washington. Similarly, Washington employers with Oregon-based workers will be required to collect and remit the payroll tax for employees performing some services in Washington and who are directed from Washington. Contact Bullard Law to determine whether this tax applies to you.
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. 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 January 1, 2025.
However, 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 (3) years within the past six (6) 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 all sole proprietors, independent contractors, and others exempt from the payroll tax, the LTC insurance program will not be available. 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 also are quite limited. Individuals can receive up to $100 per day to cover long-term care costs, with a maximum lifetime benefit of just $36,500. This equates to a year’s worth of coverage for long-term care expenses at $100 per day. Benefits are only available for approved long-term care needs. However, the list is rather broad and includes nursing facilities, assisted living facilities, adult family care homes, home healthcare, medical supports (e.g., wheelchairs, ramps), transportation, caregiver support, and memory care. In order to receive any benefits, eligible individuals must first obtain a decision from the Department of Social and Health Services that the person requires assistance with at least three activities of daily living (ADLs). 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.
Certain individuals are not subject to the tax unless they voluntarily choose to opt-in and pay the tax. Self-employed individuals, independent contractors, sole proprietors, partners, joint venturers, federally recognized tribal employees, and federal government employees are not subject to this tax during the time the individuals are in these positions. However, if any of these exempted persons take a wage-earning job later, for example, a sole proprietor takes a regular paying job, the payroll tax will then be imposed. Employees subject to a collective bargaining agreement in existence as of October 19, 2017 also are exempted, but only until the collective bargaining agreement is reopened, renegotiated, or expires.
There are a few possible opt-outs for the payroll tax as well, allowing employees to be exempted from the tax. The most significant exemption is for employees who already have long-term care insurance through their employer, assuming it provides equal or better benefits to the state program. Many employers provide or make available long-term care insurance to their employees as part of an employee benefits program. Another exemption is for W-2 earners who have their individual long-term care insurance policy in place by November 1, 2021, that provides equal or better benefits than those available in the state program. Most commercially available individual and group long-term care insurance policies provide equal or better benefits than the state program. 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 exempt employee must submit written notification to the employer, and the employer must retain the notice in its files. Once exempted, employees cannot ever opt back into the state program – the opt-out is permanent. Employers must collect the payroll tax unless an exempt employee provides the ESD approval letter to his or her employer. An exempt employee is not entitled to a refund of any taxes collected before the employer received the ESD approval letter. Employers must be sure to promptly stop collecting the payroll tax upon receipt of an employee’s ESD approval letter.
Lawsuits relating to the new program are also being proposed, including suits based on ERISA preemption. Additionally, some tweaks and changes to the program are already being proposed, and administrative rules still need to be completed. Thus, this new payroll tax and long-term care insurance program is likely to be a work in progress for quite some time to come.
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.
Content ©2021, Bullard Law. All Rights Reserved.