In 2019, the Legislature passed a payroll tax to fund a new long-term care (LTC) benefit. Under the legislation, the tax will begin on Jan. 1, 2022 and will initially be set at a rate of 0.58%. There is no cap on the wages subject to the tax.

The lifetime maximum benefit is essentially $36,500 (and will be adjusted for inflation). We wrote about the program here. The statute allows individuals to opt out of the program—and avoid paying the tax— if they have private LTC insurance.

This year, the Legislature has passed SHB 1323. As passed, the bill specifies that in order to opt out of the state program, individuals must have private LTC insurance purchased by Nov. 1, 2021.

Because all wages are subject to the tax, and because the maximum benefit is fairly low, many individuals may find it cost effective to purchase their own insurance. This could negatively affect the solvency of the trust fund.

Under the statute, beginning Jan. 1, 2024, the Pension Funding Council must adjust the payroll tax rate so that it is “the lowest amount necessary to maintain the actuarial solvency of the long-term services and supports trust account.” A constitutional amendment on the ballot last year (ESJR 8212) would have allowed the long-term services and supports funds to be invested in stocks and bonds, which would yield higher returns for the trust over time. That, in turn, would mean that the payroll tax rate could be lower.

But voters rejected the amendment. In a report to the Legislature earlier this year, the Long-Term Services and Supports Trust Commission (LTSSTC) noted, “the premium sufficient to fund expected program costs over a 75-year time horizon is now estimated to be 0.66% of wages, 20% higher than if ESJR 8212 had passed.”

The LTSSTC continued,

This does not create an urgent need for action, as even at the 0.58% premium rate, Trust revenues are projected to exceed benefits for the first few decades of the program. But without the ability to secure higher investment returns, changes to various aspects of program design, such as benefit structure or eligibility, will be needed in the medium term to support the program’s long-term solvency.

The report recommended that the Legislature put the constitutional amendment to voters again this year. Such a resolution was introduced (SJR 8200), but so far it has not been passed by the Legislature.

Another recommendation from the LTSSTC related to the solvency of the fund was to limit the ability to opt out of the program to people who had private long-term care insurance as of July 28, 2019:

Any time a voluntary aspect to participation in a social insurance program is introduced, adverse selection occurs. This drives up premiums for those who participate and introduces unpredictability that can make rate-setting challenging. According to LTSS Trust actuarial analysis, if the top 5% of all wage earners opt-out, the level of premium assessment required is increased from 0.66% to 0.68%.

As originally introduced, HB 1323 would have limited the opt-out to those with LTC insurance on July 28, 2019. As passed by the House Committee on Health Care & Wellness, insurance would have had to be in place by July 25, 2021. Now, it will have to be in place by Nov. 1, 2021.

It will be interesting to see how many people opt out of the program, and what the impact on the payroll tax rate will be.