Starting January 1, 2022, Washington will be the first state in the union to implement a long-term care benefit with a corresponding tax to fund it. What does this mean for top-producing real estate professionals?
The goal of this article is to inform you on key concepts around this hot topic, as you are likely seen as an authority on financial issues in your sphere.
Further, we aim to enable you to understand if you or those around you can proactively put yourself in a position to move forward, given the current tax landscape.
Here are a few points of discussion you may be hearing about:
- Is the new LTC tax going to be expensive for me?
- What is LTC?
- What are the pros/cons of the state plan vs. private insurance?
Before we even dive into the new tax for Washington State, we’ll start by establishing what exactly LTC is and the role that insurance has historically played in covering it.
Once you know the basics, we examine how the new Washington state tax is funded and your benefits for paying into it. And lastly, how does this tax affect Top Producers specifically and, beyond them, their sphere of influence who look to them as a resource?
What Is LTC?
A Quick Rundown
Long-term care (LTC) aims to provide care for a significant period for an aging individual who cannot provide it for themselves.
This care is different from what we receive in a trip to the hospital for a broken arm, for example. Since LTC needs to be administered for a long period, it is categorized differently and not covered by your standard health insurance or Medicare plan.
LTC insurance can be classified into three general levels: skilled nursing care, in-home care, and assisted living. It can also be administered at an onsite location or within the patient’s home.
So, whether the patient needs assistance completing “activities of daily living” (we will learn more about those in a moment) or needs skilled nursing care, LTC is the service utilized to help those individuals function on a daily basis.
LTC Insurance and Activities of Daily Living
Historically, insurance companies have sold policies that allow the purchaser to transfer the risk of covering the costs associated with this type of care.
Typically, the insurance policy is triggered to start paying a benefit after the insured cannot complete a certain number of activities of daily living (ADLs).
The six ADLs as defined by HIPPA are:
- Transferring (getting from bed to chair)
- Maintaining continence
Cognitive impairment is also a benefit trigger on its own.
Cost of Care
As you can imagine, this type of care is not inexpensive to administer. As of a 2020 survey, below are the national average costs associated with each level of care:
- Assisted living: $51,600/yr.
- In-home care: $53,768/yr.
- Nursing home: $105,850/yr.
Important Components of an LTC Policy Defined
Daily benefit: LTC insurance benefits are regularly quoted in the form of a daily benefit amount, i.e., how much the policy will pay per day for care. For financial planning purposes, you can easily convert this to a monthly amount by multiplying by 30.
Elimination period: The amount of time that must pass between the insured needing care and the insurance company starting to pay a benefit. Think of this like the deductible on your car insurance.
Inflation rider: Sometimes called a “cost of living” rider, this increases your benefit amount over time so that the benefit is not reduced by inflation between the time you purchase the policy and need the benefit.
Premium: The amount you pay the insurer each year in exchange for purchasing the policy and transferring LTC risk from you to them.
What Does the Washington State Plan Cover?
To read what the new Washington LTC plan covers in more depth, we recommend checking out the state’s site directly. Here’s a summary for your convenience:
- Benefits start January 2025.
- The maximum benefit paid is $36,500.
- The benefit can increase with inflation.
- The benefit will pay for either in-home care or an assisted living facility.
To pay for this new, state-run benefit, Washington has enacted a new payroll tax starting in January 2022.
As you may have heard, the state is offering a one-time opt-out of paying the tax if an individual has their own qualifying LTC insurance policy in place prior to November 1, 2021.
As a result, there has been a massive influx of Washington residents seeking LTC insurance policies who may not have been interested in purchasing a LTC benefit before (or even currently!), but instead are simply looking for a way around paying the tax.
If this is your goal, the place to start is a basic breakeven analysis.
The cost of the tax is a .58% premium assessed on all employee wages. Below are a handful of examples at various wage levels for how much an individual can expect to pay into the program in 2022.
Annual Income Annual Tax Assessed
The breakeven analysis requires only basic math to calculate the expected tax. Just multiply gross income by the .58% premium.
Once you have this dollar amount, compare the cost of the tax to the cost of the premium to purchase a stand-alone policy on the open market. If an individual’s singular goal is not to pay the tax, the lowest number wins.
While the concept of running a breakeven analysis is simple within the vacuum of examining a single year, we recommend thinking for the long run when making this decision.
Assuming the tax applies to you (more about that in the next section), here are a few questions to consider along with the breakeven analysis thought process:
- Do I anticipate my income raising significantly in the future?
- As your income grows, so will the amount of tax you pay, due to there currently being no income cap on the .58% tax. Additionally, the state could also increase or decrease the rate of the tax in the future.
- Do my LTC policy premiums increase each year, or are they a level payment for the policy’s life?
- LTC insurance policies can be written with different characteristics. Make sure you understand whether the premium that you pay in Year 1 will stay level or go up as you get older.
How Does This Apply to Top Producers?
Highly successful real estate professionals in Washington state are largely excluded from needing to make an immediate decision around LTC, primarily due to the corporate structures that are most common in the industry.
The new benefit does not cover sole proprietors and LLC owners who are simply 1099 contractors unless they specifically opt in. The rules are similar to the Washington paid family and medical leave rules established in 2020.
However, S corp owners, another popular corporate structure for Top Producers, will be covered by the state plan if they receive W-2 income from the business. The corresponding tax for the LTC benefit would be assessed only on the W-2 portion of their income and not the dividend component.
“Opting out” have been the buzzwords surrounding the new LTC benefits and tax. While they likely don’t apply to you as the owner of your real estate business, they probably do apply to many of your clients and others in your sphere of influence.
Opting out is accomplished by having purchased a qualifying LTC insurance plan before November 1, 2021. To learn more about qualifying plans, check out the Office of the Insurance Commissioner’s website.
If an individual chooses to opt out of the tax, this is a permanent decision, and they cannot enroll later.
The process for opting out includes submitting an exemption application between October 1 and December 31 of 2021. After that, the exemption will not be available.
So, What Does All This Mean?
As previously mentioned, Top Producers very well may not even be affected by the tax due to the business structure they have selected.
Similarly, the tax structure of an S corp limits the amount of your total income that will be subject to the tax. This is important when calculating your breakeven analysis and deciding if the best decision for you is to purchase a stand-alone policy and opt out of the tax.
It is vital to remember the two driving components for anyone making this decision, beyond just trying to save money by opting out of the tax:
- Is LTC a risk that you want to pay an insurer to take on instead of retaining the risk yourself?
- Is there a more cost-effective way to obtain this benefit than the state plan?
If you have questions or want to dive into your specific situation in greater depth, feel free to reach out to our team of financial planners.