Starting in 2022, most Washington state employees pay a new WA Cares Fund payroll tax. That new payroll tax supports a new long-term care insurance plan. Which sounds good.
But the new tax will cost some workers large amounts of tax.
And then this planning reality: people often can wriggle out of the tax.
Accordingly, this blog post digs into the details. And it looks at the ways small business owners and employees can avoid and minimize the tax.
WA Cares Fund Tax Formula
Let’s start with the tax formula.
The new long-term care tax applies to the wages of employees working in Washington State.
The tax rate starts at 0.58%. So slightly more than half a percent. A part-time worker who earns $10,000 in a year pays $58, for example. And a full-time professional who earns $100,000 a year pays $580 annually.
But no cap on the tax exists. So, a technology company executive who earns $1,000,000 a year pays $5,800 annually. Someone who earns $10 million in some year (perhaps due to employee stock windfall) pays $58,000.
And an important caution here: The statute hints the state may need to bump up that 0.58% rate over time to maintain actuarial solvency. (See RCW 50B-04.080 for the language that creates this requirement.) Further, the plan risks insolvency in future years due to overly optimistic estimates of investment returns. (Richard Birmingham did a nice job explaining this and other messy aspects of the new WA Cares Fund in a post at the Davis Wright Tremaine blog.)
Long-Term Care Benefits Under WA Cares fund
The state’s long-term program provides all the usual long-term care expenses.
The actual benefit formula says a worker gets up to 365 days of a daily $100 benefit.
Note: The WA Cares Fund statute adjusts that $100 amount for inflation.
Time Lag for the Insurance Benefit
The legislature describes the new statute as insurance, but the insurance doesn’t start right away. Even if you need long-term care immediately.
Someone who participates in the WA Cares Fund starts paying the payroll tax in 2022.
But the earliest someone might receive a benefit? In 2025.
Workers qualify for the long-term care insurance in one of two ways:
- Method #1: Someone pays premiums on at least 500 hours of wages for three years of the previous six years.
- Method #2: Someone pays premiums on at least 500 hours of wages for at least ten years and with no interruption of five or more consecutive years.
For the next decade, then, workers only get a temporary “three years of coverage” window using Method #1.
Starting in 2032, however, workers may get “lifetime” coverage using Method #2.
One other wrinkle: Only Washington State residents enjoy coverage from the WA Cares Fund. Leave the state and you lose your insurance. (By the way, if you return to the state and qualify under Method #2, that return should restart your insurance.)
Is WA Cares Fund Good Insurance?
So is the WA Cares Fund “good” long-term care insurance?
Well maybe for some folks the answer is “yes.” Someone who works enough hours to get coverage but makes a modest income enjoys a pretty good deal.
A worker making $10,000 annually would get coverage after three years of $58 annual premiums (for the next three years). So for $174 in total premiums, potential benefits of $36,500 within a three year window.
Someone making $10,000 annually for ten years would get permanent coverage as long as Washington State residency is maintained. So for $580 in total premiums, potential benefits of $36,500 as long as the worker still lives in Washington State.
Nevertheless, we think for most workers, the insurance works poorly. Anyone earning an average wage or more can probably get a cheaper, better, and more flexible long-term care policy.
Note: The prices you see quoted for long-term care policies look to run around $300 to $500 a year. Talk to your insurance agent for more information.
Which brings up the subject of the two ways a worker can sidestep the insurance.
Washington State Long-term Care Insurance Exemption
The first way to sidestep the insurance? If you carry long-term care insurance, you can request an exemption.
Specifically, if you have or if you acquire long-term care insurance before November 1, 2021 and apply for an exemption between October 1, 2021 and December 31, 2022, you avoid paying the tax.
In online forums, Washingtonians have worried about the state granting exemptions. But the statute seems to suggest that the Employment Security Department (the agency that largely administers the new insurance) may accept taxpayer’s attestations without verification. (You would want to watch this detail carefully as the state provides guidance.)
And then this really important note. The statute’s language makes an exemption from the long-term care program permanent. Here’s the actual language from RCW 50B.04.085 (with boldfacing and italics added):
(1) An employee who attests that the employee has long-term care insurance may apply for an exemption from the premium assessment under RCW 50B.04.080. An exempt employee may not become a qualified individual or eligible beneficiary and is permanently ineligible for coverage under this title.
Note that once exempt, employees do need to notify employers so employers don’t withhold the tax.
Many high income workers, probably anyone planning on moving out of Washington State, and maybe most folks planning to retire soon should request an exemption. Even if making that request requires someone to obtain long-term care insurance.
Small Business Owners Often Not Impacted
Something else to know: If you’re a small business owner, you may not even be an employee.
For example, if you operate as a sole proprietorship? Like say you’re an independent contractor receiving a 1099? Or that you operate a single-member LLC taxed as a sole proprietorship? You technically are not an employee according to state law. And you would not typically pay the long-term care payroll tax.
A similar situation exists for partnerships. If you’re a partner in a general partnership? Or you own an interest in a multiple-member LLC taxed as a partnership? You would not typically pay the tax for the same reason.
And this subtlety—predictable once we mention it. If you own a single-member LLC or you own an interest in a multiple-member LLC and the LLC gets taxed as an S or C corporation? That’s a more complicated situation. Because federal tax law may treat you as an employee for income, Social Security, and Medicare tax purposes. But usually you should not be subject to the Washington State long-term care tax. Why? Because state unemployment law already says LLC members don’t count as employees.
This is a question for your attorney, or maybe your attorney and accountant, but we think some small corporations may want to reform their firms as limited liability companies before 2021 ends.
To give you one example of how this could work, with the help of the firm’s attorney an existing small business corporation owner could set up a new limited liability company, elect to have the LLC treated as a corporation, and then merge the old corporation into the new limited liability company.
To provide another example that the accountants would often comfortably orchestrate, a business owner could also set-up a new limited liability company, make an election to have that LLC treated for tax purposes in the same way as the existing corporation is treated, and then contribute the old corporation to the new limited liability company. (If the LLC and corporation were both S corporations, in this example, the old corporation becomes a qualified Subchapter S subsidiary.)
Self-employed Business Owners May Opt-in
And then just to be thorough, a point to make: The state’s new insurance program allows self-employed people to opt in to the program.
You may want to consider that. Especially if your situation means bargain premiums. (For example, you work at least 500 hours but maybe not much more than that and earn a modest hourly wage.)
One Final Tax Avoidance Trick: Convert Tax to a Fringe Benefit
Here’s another option to consider. The new state law envisions employees paying the 0.58% payroll tax.
But an option for some small businesses to consider? Providing the new long-term care coverage as a non-taxable fringe benefit. So similar to employer-provided health insurance.
Keeping the numbers simple, for example, an employer planning on giving an employee making $100,000 a year a $3,000 raise might instead pay the employee’s $580 Washington state long-term care premium and then raise the employee’s salary by $2,420.
The employee gets the same $3,000 bump in compensation. But $580 of the bump comes as nontaxable fringe benefits.
An employee paying a 20 percent marginal tax rate saves roughly $120 via this gambit.
Two notes about this idea. First, employers would benefit from an IRS notice that says directly whether and how employers can do this.
Second, if an employee uses a health savings account, possibly the Washington State long-term care premium or tax can be paid from that account. And if that’s case, paying (indirectly) from a health savings account becomes another way an employee can use tax savings to subsidize the new insurance.
Note: The rules for using health savings accounts for long-term care insurance get tricky. The payroll tax needs to be considered a premium, for example. And the WA Cares fund needs to be considered a qualified long-term care contract.
The actual statutes appear here: Revised Code of Washington 50B.04.010
The Lane Powell blog also provides a good detailed post on the new statute here, including recent updates to the law: Washington State Payroll Tax Funds Long Term Care.