In 2022, Washington state implemented a law mandating employers to levy a 0.58% payroll tax on their employees, unless those employees possess private long-term care insurance. This initiative aims to create a financial pool to provide limited lifetime benefits to eligible Washington residents. Similarly, California is contemplating the introduction of a comparable insurance program.
The rising number of Americans aged 65 and older, projected to surpass the population of those under 18 by the end of this decade, has thrust long-term care into the spotlight as a significant health concern. Consequently, various state legislatures are deliberating the imposition of mandatory long-term care insurance.
Long-Term Care in the US
Long-term care encompasses a range of services designed to meet an individual’s health and personal care needs over an extended period. These services are crucial for helping individuals maintain their safety and independence when they can no longer manage daily activities on their own. People typically require long-term care due to chronic health conditions or disabilities, which can manifest suddenly, such as after a stroke, or develop gradually as a result of deteriorating health.
Long-term care insurance plays a vital role in covering the costs associated with such care. These policies usually reimburse policyholders for care received in various settings, including their homes, nursing homes, assisted living facilities, and adult daycare centers. It’s important to note that individuals cannot purchase long-term care insurance when they already require it; approval is typically contingent on not having a debilitating condition, and many insurers decline applicants over the age of 75.
Given that Medicare and private health insurance plans do not cover long-term care expenses, individuals without long-term care insurance must either pay for it out of pocket, draw from their assets, or rely on Medicaid arrangements like Medi-Cal in California.
In Washington, the introduction of a payroll tax of $0.58 per $100 of income was enacted to fund a long-term care benefit of up to $36,500 over a policy’s lifetime, with a maximum daily benefit of $100. Companies have the option to pay this tax, but few have chosen to do so. The legislation, known as the WA Cares Fund, caught most Washington residents by surprise, leading to a rush among both companies and individuals to secure private insurance policies before the tax exemption deadline of November 1, 2021. The overwhelming demand caused insurance companies to stop offering products, and many policies could not be issued in time.
Key details of the WA Cares Fund include its applicability only to employees without an income cap, benefits being payable exclusively to Washington residents receiving services within the state, and a requirement that benefit recipients need assistance with three or more activities of daily living (ADLs), whereas most private individual insurance policies require assistance with only two ADLs. The tax collection began in July 2023, and eligible individuals can expect benefits to become available in July 2026.
Long-Term Care Insurance in California: A More Flexible Program
Meanwhile, California has established a task force to propose options for implementing its own state long-term care insurance program. Preliminary recommendations suggest a more flexible program compared to the WA Cares Fund. These recommendations include an effective date of January 1, 2025, with a potential 12-month look back period for private coverage to qualify for a tax exemption, the possibility of an opt-out provision, reduced program contributions for policies purchased after the program’s enactment, primary payment to Medi-Cal but secondary to Medicare or private insurance if such benefits exist, a requirement of assistance with two ADLs for qualification, the potential for both employer and employee contributions, and a payroll tax of up to 2% with no income cap. If the program is enacted on January 1, 2025, private policies must be in place by January 1, 2024, raising questions about the criteria for qualifying private plans, potential market saturation in California, and the need for ongoing policy maintenance to maintain tax exemption.
The task force submitted a feasibility report to state leaders on December 23, 2022, which is currently undergoing financial analysis by the California Department of Insurance (CDI). An actuarial report will be presented to the state legislature by January 1, 2024.
The importance of early action
From our experiences with the Washington program, we found employers who were best prepared for the Washington program’s rollout had done many (if not all) of the following:
Understood the tax implications versus benefit coverage, researched the differences between state and private plans, considered group plans for employees, and evaluated the pros and cons of employer contributions versus voluntary contributions.