Is a long-term care tax coming to your state?
January 2, 2024
Several states consider a long-term care tax for those who do not own LTC insurance
A number of states and the federal government have offered tax incentives for many years encouraging people to buy long-term care insurance. Now many states are looking at taxing your wages unless you have a qualified long-term care insurance policy.
This follows Washington State that recently implemented a long-term care tax for those who don’t own private long-term care insurance. Without private LTC insurance, people are being taxed 58 cents on every $100 earned.
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Reaction In Washington
The action taken by Washington State surprised many residents as they were given limited time to get a qualified long-term care insurance policy to exempt themselves from the tax. The program created so much outcry that the Washington Governor later signed a law that delayed the start date, but the delay did not extend the limited time allowed to buy coverage to avoid the new long-term care tax.
For those without private LTC insurance, the new LTC payroll tax will provide a state-supplied Lifetime Benefit of $36,500 for long-term care needs. Considering that Washington State has some of the highest long-term health care costs in the country, $36,500 does little to protect an individual from long-term care costs.
To put this in perspective, Washington State’s average annual cost for Nursing Home care is over $125,000, and is projected to be over $225,000 in 20 years. Even a Home Health Aide for in-home care is almost $80,000 (44 hours per week) and is projected to cost over $140,000 in 20 years.
Lawmakers Reasoning For A Long-Term Care Tax
Lawmakers want the tax to help shore up the Medicaid program, the country’s number one payor of LTC costs. Not to be confused with Medicare, Medicaid is the nation’s public health insurance program for people with low income. To get care paid for by Medicaid, one must have little or no income and assets. Because many families fail to plan ahead for their long-term health care needs, they must deplete assets and rely on Medicaid. This has created an enormous burden on Medicaid that is growing with inflation.
Declines in health due to age, illness or accidents can cause the need for long-term health care. When someone requires help with their daily living activities or needs supervision due to dementia, they need custodial care. But custodial care is not covered by traditional health insurance or Medicare. Without a long-term care plan, individuals must pay for their own care, or have family members become caregivers. Critics of the tax argue that a small state-supplied benefit, covering a fraction of one year of care, isn’t the answer.
States Considering a Long-Term Care Tax
Following Washington, several other states are moving to start their own long-term care tax programs. California, Maryland, New York and Pennsylvania appear the closest to implementing a long-term care tax. Here’s a partial list of other states considering similar laws: Alaska, Colorado, Hawaii, Illinois, Maine, Michigan, Minnesota, Missouri, Montana, North Carolina, Oregon and Utah.
Important points to consider before a plan is enacted in your state:
- Limited or No Opportunity to Opt Out – A big unknown is whether states will give their residents advance notice to avoid the long-term care tax by buying private LTC Insurance. It can take 6 – 8 weeks to apply and be approved for coverage. Because of this limited notice, many Washington residents were not able to buy private insurance and avoid the LTC payroll tax. Due to this being a one-time only exemption, the residents that missed the deadline will have to pay this tax for as long as they are employed in Washington, with very few exceptions.
- No Cap on Taxes – Because the tax has No Cap (applied to all your income), the more money you make the more you pay. This is how the Washington program works and we don’t yet know if other states will do the same.
- State Supplied Benefits Are Very Low – As outlined above, the Washington State program has a Lifetime Benefit of $36,500. Far from adequate in a state where the annual cost of care is over $125,000. Initial details released from other states tells us they are considering similar benefit levels.
California Long-Term Care Tax
The California Long-Term Care Insurance Task Force has done extensive work in conjunction with Oliver Wyman Consultants proposing options for a program and long-term care tax. The Oliver Wyman report, including five final options, has been delivered to the California legislature.
The deadline to propose new bills in the CA legislature for 2024 was Feb.16th, so it does not look like a bill will be proposed this year. Perhaps this is a good thing, because it gives the members of the legislature more time to read and understand the Oliver Wyman report, ask questions, and have a better understanding of the options before writing a bill.
If a bill is written in 2025, and there is a full opt-out offered, what type of LTC coverage will qualify? Will inflation be required, and if so, how much? Will there be a minimum benefit amount required? All of this is currently unknown in California.
New York Long-Term Care Tax
New York proposed a bill again on January 31, 2024 – Senate Bill 8462. It is similar to the last version, but with a few updates. Self-employed people will have to pay the tax. The following four permanent exemptions were also added:
- Veterans of the U.S. military on 70% service-connected disability or higher
- Individuals with non-immigrant work visas
- Employees who do not reside in the state of New York
- Are a spouse or registered domestic partner of active-duty military of U.S. armed forces
Other improvements from the last version include pro-rata vesting for individuals born before January 1, 1972, who are unable to meet the full 10 year lifetime vesting. They will receive 1/10 of benefits for each year worked after program implementation. This newer bill has also changed qualifications for benefits from 3 out of 10 ADLs (Medicaid qualifiers) to 2 ADLs – but without mention of cognitive impairment as separate.
However, for purposes of any opt-out, if offered, nothing has changed. New York’s current definition of LTC insurance only applies to traditional LTC insurance. It is hoped that New York will expand their definition of LTC insurance to one that also includes hybrid long-term care insurance plans.
Maryland Long-Term Care Tax
Earlier this year, Maryland proposed a bill to study LTC solutions for the state. But in a rare move, both sponsors withdrew their bills. At this point, there is no action in Maryland.
Pennsylvania Long-Term Care Tax
Pennsylvania proposed a bill in 2022, and did so again in 2023 without success. Provisions in the bill came primarily from the WA Cares Fund “template,” including a premium tax of 0.58%. A tax exemption for those owning LTC insurance was included in the bill, but with no other details. We will have to wait and see if Pennsylvania tries again in 2024 with the same bill or another version.
LTC Payroll Tax and Younger Workers
Normally we suggest planning for future long-term care needs when you reach your 50s. But, this scenario of being forced to pay a state long-term care tax the rest of your working years is a compelling reason to buy private long-term care insurance now. Consider the following:
- Younger workers with high earning potential stand to save the most. Especially if your state has No Cap on the amount of long-term care tax you’ll be paying.
- Hybrid Life Insurance policies with a qualified long-term care rider (meeting the legal requirement under Section 7702(b) of U.S. Code) are affordable. These Hybrid LTC plans meet the important need for life insurance while meeting the qualified long-term care benefit needed to exempt you from an LTC Payroll Tax.
- With a 10-Pay or Single Payment option there’s no risk of rate increases.
- Premiums are significantly lower at younger ages, plus you lock-in the good health you have today.
- When buying long-term care insurance, try not to buy the smallest plan available to avoid the long-term care tax. A well-designed long-term care insurance policy will protect income and assets from the high cost of extended care. And you’ll be able to choose high quality care, including in-home care, without burdening your family. Plus, LTC insurance also protects your 401(k) and other retirement accounts.
Qualified LTC Insurance Policies – Federal Code 7702(b)
As happened in Washington State, you may have little notice before your state enacts a Long-Term Care Tax. Don’t wait to get protection! To avoid being taxed, you must have a tax-qualified long-term care insurance policy following Section 7702(b) of the U.S. Code.
Work with a long-term care advisor who represents many top-rated companies. Know that insurance premiums can vary widely between companies for similar coverage and your health history is critical when applying for coverage. Your LTC Advisor will match your age, health, and family history with the right company.
Don’t focus on avoiding the long-term care payroll tax. Instead, get a quality long-term care plan, unless you have little income and don’t expect your earnings to increase. Yes, it may be possible to replace or add to your coverage later. But that would be based on your age and health at the time which may not be feasible.
Few employer-sponsored Group LTC plans exist. Those available often not your best option, unless you have health issues limiting your choices. In that case, a Group LTC Plan may work best because it may have more relaxed health underwriting requirements.
Federal LTC Tax Incentives
Washington DC is not coming to the rescue with LTC coverage. There have been some proposals to enact a national plan, but with little backing. President Biden has talked about expanding tax incentives if you buy coverage. But congress has little support to do more than what they have already done. Current federal long-term care tax incentives will continue.
Start Your Long-Term Care Planning
- The risk of needing long-term health care at some point in your life is real, and the states lack the funds to pay for everyone’s future care. Being prepared is a good idea – tax or no tax.
- More states are looking at legislation as a way to handle the increasing issue of aging and long-term care costs. Don’t wait until you’re left with a small window to opt-out of a coming tax like many Washington State consumers.
- Prices are based on your existing age so premiums will never be less than today. And you must have good health to qualify so a change in health could make you uninsurable.
