Long-Term Care Premium Tax Formally on Ice

Lawmakers have passed the promised legislation delaying the implementation of Washington state’s novel long term care premium tax until July 2023 — almost 18 months. Summary here. Washington Governor Inslee signed the new legislation the same day, January 27, 2022. Employers who have already withheld the tax will need to refund it to their employees within 120 days. Those about to run their payroll should take steps to avoid (further) withholding of the tax.

For those just coming to this party, here is a summary of how we got here.

In a nutshell, Washington state was supposed to impose a 0.58 percent tax on all employee compensation, beginning January 1, 2022, to fund the creation of a trust fund that would pay out long term care benefits under a program known as WA Cares.  

Our firm (and others) noted several serious flaws in the design of the program, some from the original 2019 legislation and some flaws from as recent as last May, including:

1. Many employees paying into the program would not work enough years to vest in the benefits;
2. Employees residing outside of Washington state, but working within the state, were subject to the tax even though benefits were only available to cover expenses for in-state services;
3. The opt-out period for those with commercial long term care policies was very short and didn’t require maintenance of private coverage beyond the opt-out window; and
4. Coverage limits were way too low to be really meaningful to those needing them.

Nevertheless, the premium tax was substantially revised last Spring — in ways that either exacerbated, or failed to address, these problems, and was scheduled to go into effect on January 1 of this year. As the effective date approached, the outcry of complaints — and litigation — began to grow. Further, the law of unintended consequences meant that (virtually?) all of the private long term care insurance providers stopped writing pure long term care policies for Washington state residents in part out of fear that (i) their insureds would simply cancel after one year, or (ii) potential purchasers might conclude that private insurance wasn’t necessary because of the state-mandated plan.

In late December, Governor Inslee announced that he would seek a material delay in the plan, and even suggested that employers need not begin withholding the following week. Of course, the Governor could not repeal or delay a law by press release, so lawyers (including those for the state) generally recommended that employers begin withholding on January 1, notwithstanding the promises from the Governor, and legislative leadership, that the tax would be delayed.

The Governor also immediately signed companion legislation (summarized here) that fixes some of the problems noted above (such as partial vesting for those near retirement), but retains others (such as only allowing benefits to the extent spent in Washington), which raises the obvious question of whether the retained provisions are considered features or bugs. The 18-month delay should provide ample time to re-examine the law with the goal of enabling a less contentious implementation — and possibly avoid the loud chorus (mostly from the Republican side of the aisle) for complete repeal. We are not betting who will ultimately prevail, but we are telling individual clients that, if they obtained private LTC insurance as a means to opt-out of the state program, then they would be well served to maintain those policies — at least until the fog dissipates. 

We anticipate that the next legislative session will begin addressing the hard question of whether the program is sustainable at its current premium level (0.58% of compensation). Even before these changes, some independent actuaries had suggested the premium rate would need to be closer to .66% of compensation – and that estimate came before some 470,000 people (approximately five times the legislative estimate from last spring) obtained private insurance and opted out before the December 31, 2021 deadline.

Employers who collected premiums are now required under this legislation to refund collected premiums to employees within 120 days. If premiums were collected but not yet remitted to the Employment Security Department (ESD), the employer is required to refund the premiums to the employee. If remitted to ESD, they must be refunded to the employer within 120 days of the collection of the premiums, and the employer must then return any premiums collected from the employee.

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