Update on the Washington state long term care tax, where it currently stands, and where it is going next.

If you are reading this and thinking to yourself  “no big deal, I don’t live in Washington State”  I have bad news for you..

13  other states are considering similar legislation and I would suspect that over the course of time almost all jurisdictions will impose some sort of tax like this, if it is not done nationally.

First, a brief background.

In 2019 the Washington state legislature passed a .58% tax on all earned income for Washington wage earners. The revenue from this tax was going to fund a long term care benefit of up to $100 per day for every participant in the program subject to certain conditions.  The benefit would last one year, for a total of $36,500 of benefit.

A quick back of the napkin math shows that anybody who makes middle to upper income or more, for any period of time is going to pay far more into the program than they would ever receive. The benefits are also unavailable for people who move out of state, and there is no death benefit.  This means if a high income wage earner paid hundreds of thousands of dollars into the tax over their lifetime, and then retired to another state, they would never even have the chance of recouping their $36,500.

Long story short, the more you make, and the younger you are, the worse this is for you.

In my estimation a greater concern is that that tax rate can change.  .58% could rapidly become 1.58% which could rapidly increase to 2.58% et cetera et cetera. For instance, the WA PFML tax rose from .4% to .6% from 2021 when it started to 2022.  Doesn’t seem like a lot?  That is a 50% increase in one year!

In my opinion this is almost guaranteed given that, when the implementation of the tax crept up on Washington taxpayers, almost every major employer brokered long term care policies for their employees that allowed them to become exempt from the plan.  Every insurance broker did nothing but write long term care exemption policies for a solid year. That means a gigantic portion of the highest earning wage base in the state became exempt from the law. The actuarial numbers are a train wreck.

Every insurer in the state bar a couple also stopped selling the qualifying policies during the pandemonium.  We are in no-mans land.

Here were the exemption rules.

You must have placed in force/paid for a qualifying LTC policy by November 1, 2021.

You then had until December 31, 2022 to file for an exemption.

Many residents believe they have until Dec 2022 to obtain a qualifying policy.  That is incorrect, the window has closed.  Barring any legislation change it will not open again.

Many clients of mine also erroneously believe that the law has been repealed, that they no longer need their exemption policy, and that they can cancel the policy they took out to avoid the tax in the first place.

NOTHING HAS CHANGED in the law itself to date!  The law still exists!

The only action taken by the State of WA so far has been to suspend collecting the tax until July 2023.

I am currently advising all my clients to hang on to their current exemption policies (I am still paying on mine).  If you cancel the policy now, and they do not change the legislation (when was the last time you knew Olympia to reduce or eliminate a tax?) you will be stuck paying the tax.

Even if they do extend the date to obtain a policy, in my opinion, it will be extremely expensive (or impossible) to obtain a policy as insurers absolutely fled the WA market the last time.

The consequences, especially for high income wage earners, of not having an exemption policy are too high to gamble that this just goes away.