Washington’s new long-term care payroll tax

Beginning January 1, 2022, employees in the state of Washington will be subject to a payroll tax of 0.58% on all earned income for the WA Cares Fund, the country’s first state-run long-term care insurance program. Employers will be responsible for withholding the payroll tax from employee wages and for submitting payments and quarterly reports to the Employment Security Department (ESD).

In 2019, the Long-Term Care Trust Act, now known as the WA Cares Fund, was signed into law. It was amended on April 21, 2021, by Substitute House Bill 1323. The following Q&A provides further details for employers with employees working in Washington.

What is the WA Cares Fund?

The WA Cares Fund provides long-term care insurance for certain Washington residents. The program is funded through a payroll tax imposed on employees working in Washington, starting January 1, 2022. Employers make no contributions to the program. The premium contribution rate is initially set at 0.58% of all wages and remuneration, with no wage cap. “Covered wages” generally include commissions, bonuses and other taxable compensation. Beginning in 2024, the premium contribution rate will be adjusted every other year.

Benefits will be available to eligible individuals starting January 1, 2025. Eligible individuals are those employees who have paid premiums for either (a) 10 years without an interruption of five or more consecutive years, or (b) three years within the last six years. Employees must also have worked a minimum of 500 hours during the 10- or three-year time frames. Individuals currently retired or out of the workforce would not pay into the program and would not be eligible for the benefit.

Eligible services — such as adult day care, assisted living and nursing homes — will be reimbursed on a given date using “benefit units” of up to $100 per day (adjusted annually), up to a lifetime maximum benefit of 365 benefit units ($36,500). In order to receive benefits, individuals must be age 18 or older, reside in the state of Washington at the time of the claim, meet the minimum level of assistance with activities of daily living (e.g., eating, bathing or dressing) necessary to receive benefits through the program, and not have exhausted the lifetime limit.

Are there any exemptions from the payroll tax?

While most employees working in Washington will be required to make payroll contributions toward the WA Cares Fund, there are limited exemptions, including:

• Employees of the federal government
• Employees of federally recognized tribes, although the employer may elect for its employees to participate
• Employees and employers who are parties to a collective bargaining agreement in existence as of October 19, 2017, unless and until the agreement is reopened, renegotiated or expires
• Self-employed individuals, although they are permitted to opt in if they meet certain requirements
• Certain employees who purchase qualifying long-term care insurance before November 1, 2021, and submit the required application (and have the application approved by the state) in a timely manner (see below)

How do eligible employees apply for an exemption?

An employee who has qualifying long-term care insurance in effect before November 1, 2021, and attests to that fact may apply for a permanent exemption from the payroll tax. Note that unless the law is amended, an employee who does not enroll in long-term care insurance until after the November 1 deadline will not be eligible to opt out. The employee must be 18 years of age or older on the date he or she applies for the exemption. Applications for an exemption will be accepted electronically only from October 1, 2021, through December 31, 2022. After the employee’s application is processed, the employee will receive an approval or denial letter. If the application is approved, the employee must notify any current or future employer of his or her exempt status and provide the employer a copy of the approval letter, which the employer must maintain on file. The exemption is effective as of the first quarter following the approval, and premium deductions should cease at that time. An employee who fails to notify the employer of an exemption is not entitled to a refund of any premium deductions made before notification is provided. An employee who is approved for an exemption is permanently ineligible for benefits from the WA Cares Fund.

What long-term care insurance qualifies an employee for the exemption?

The implementing regulation defines long-term care insurance as an insurance policy, contract or rider that is advertised, marketed, offered or designed to provide coverage for at least 12 consecutive months for a covered person. It may be on an expense incurred, indemnity, prepaid or other basis, for one or more necessary or medically necessary diagnostic, preventive, therapeutic, rehabilitative, maintenance or personal care services, provided in a setting other than an acute care unit of a hospital. It includes any policy, contract or rider that provides for payment of benefits based upon cognitive impairment or the loss of functional capacity. It also includes group and individual annuities and life insurance policies or riders that provide directly or supplement long-term care insurance. It does not include any insurance policy, contract or rider that is offered primarily to provide coverage for basic Medicare supplement, basic hospital expense, basic medical-surgical expense, hospital confinement indemnity, major medical expense, disability income, related income, asset protection, accident only, specified disease, specified accident or limited benefit health.

What are employers required to do?

Employers are required to withhold the appropriate salary reductions from employees’ wages each pay period starting January 1, 2022. Employers must then submit payments and quarterly reports to the ESD by the last day of the month after the end of the calendar quarter. Employers are also required to stop payroll contributions when provided an exemption approval letter from an employee and also maintain copies of the approval letters. An employer is not required to notify employees about the WA Cares Fund but should consider doing so, particularly in regard to the payroll deductions that will start in 2022. The employer can also inform employees about the opt-out requirements so that employees with qualifying coverage can take the necessary steps to opt out when the application process opens in October 2021. Earlier notification from an employer could also give employees an opportunity to find and purchase long-term care insurance ahead of the November 1, 2021 deadline and avoid the payroll tax. Washington has started to provide information about the WA Cares Fund, but the ESD’s timeline indicates that outreach efforts for employees will not happen until later in 2021. Providing more advance notice of these new requirements may be particularly important to employees given their limited opportunity to opt out.

What should employers consider doing now?

1. Employers should prepare for the employee payroll deductions and related reporting that will start in 2022, which may include confirming that their payroll vendor is making the necessary changes to enable them to start collecting the contributions and submitting the reports when required.
2. Employers should consider providing information to employees about the WA Cares Fund, including information about the payroll deductions and upcoming deadline for the opt-out exemption.
3. Employers will want to be sure that they have an internal process in place to collect opt-out approval letters from employees, to cease payroll contributions for any employee who provides an opt-out approval letter and to retain copies of any opt-out approval letters they receive.
4. Employers considering offering long-term care insurance to their employees so that employees can opt out of the WA Cares Fund will need to act quickly to ensure that the coverage is effective before November 1, 2021. It is important to note that unless the law is amended, there will be no opportunity for employees to opt out of making payroll contributions if they enroll in long-term care insurance on or after November 1, 2021.