For many years, both state and federal governments have enacted tax incentives to promote the purchase of Long-Term Care Insurance. Following the example set by the State of Washington, nineteen states are contemplating implementing a tax on individuals who do not possess a qualifying Long-Term Care Insurance policy.
Washingtonians were granted a brief window to establish a qualifying Long-Term Care Insurance policy to circumvent the payroll tax of 58 cents for every $100 earned. This plan, however, was delayed when Gov. Inslee signed a law on January 27, 2022, postponing the program's commencement until July 1, 2023. The payroll tax is now in effect, and the state will no longer provide residents additional time to secure coverage to bypass the tax.
Supporters of the "LTC Tax" argue that the funds generated through the program will contribute to financing long-term care services. However, detractors contend that the provided benefits will have minimal or no significant impact, potentially straining many taxpayers' finances. Moreover, critics raise concerns that many residents may mistakenly believe they possess comprehensive long-term care coverage, when in reality, they do not.
Here is the issue, those Washingtonians who do not own a policy will have a state-supplied benefit of $36,500 of lifetime benefits to pay for extended care needs. Considering that Washington is one of the country's most expensive states for long-term health care, according to the LTC NEWS Cost of Care Calculator, the state plan is hardly a plan for long-term care, and critics call it a cash grab.
For example, Seattle's average cost of in-home care is around $6900 a month (based on a 44-hour week). Nursing homes in Seattle average nearly $12,000 a month, but the cost is expected to average nearly $23,000 a month in twenty-five years.
State Budget Pressure Due to Medicaid Spending Reason for Tax
The tax is intended to help fund the Medicaid program, the country's primary payor of long-term health care expenses. You must have little or no income and assets to qualify for Medicaid. Many people fail to plan for long-term health care. There will be future declines in a person's health due to illness, accident, or the impact of aging. As a result of the consequences of aging, many people will need help with daily living activities or supervision due to dementia. Having no long-term care plan means they must pay for their own care or have family members become caregivers.
The stress on Medicaid is tremendous and is expected to grow in the coming decades. There is debate whether Washington, or other states, are interested in promoting Long-Term Care Insurance, but they are interested in finding resources to pay for care for those with little or no assets.
Medicaid is the largest payer of long-term health care expenses nationwide. To qualify for the Medicaid benefit, an individual must have little or no income and assets.
As a result of Americans living longer today and in need of services later in life, state Medicaid budgets are becoming strained. In anticipation of a growing number of baby boomers potentially needing Medicaid for LTC purposes, states are seeking ways to ease the burden.
More than 30% of U.S. states are considering implementing their versions of an LTC Tax, with numerous states already in the process of drafting legislation akin to the Washington Cares Fund.
California Makes Progress on State-Funded Long-Term Care Program
California is making considerable progress toward its own state-funded long-term care program, and other states are close behind. Assembly Bill 567, introduced in January 2023, presents five options under consideration by a task force.
California is forging ahead towards establishing its own state-funded long-term care program, with other states closely following suit. Assembly Bill 567, introduced in January 2023, lays out five potential paths currently under review by a task force.
A comprehensive 115-page report from consultant Oliver Wyman presents five potential programs for California. The recommendations include:
- "Supportive benefits" offering $36,000 over two years, encompassing services like caregiver support, adult day care, meal delivery, transportation, durable medical equipment, and minor home modifications.
- "Targeted benefits" that provide $110,400 over two years, which covers the same services as the first option, plus home care and residential care facility benefits.
- Comprehensive benefits of $36,000 over a single year, offering the same coverage as the second option. This recommendation is said to be "inspired by the WA Cares Fund design with select updates."
- Comprehensive benefits of $81,000 over 18 months, including services covered in option three, with additional care in a skilled nursing facility.
- Comprehensive benefits amounting to $144,000 over two years, covering the same services as in the fourth option.
The task force aims to settle on a recommendation by the conclusion of this year.
Politics and California
Nonetheless, the political dynamics in California may influence the timeline of a potential tax program. An anonymous state senate source informed LTC NEWS that insiders close to Gov. Gavin Newsom await President Biden to change his reelection intentions. Despite the tight timeframe, if President Biden were to withdraw his reelection bid, Gov. Newsom would likely vie for the nomination. Some within the governor's circle view the long-term care proposal as potentially hurting him in some primary states. In contrast, others perceive it as another instance of Newsom's progressive policies. However, in practical terms, the governor will likely sign the bill that reaches his desk.
Any tax in California would be on earned income, including bonuses, vacation time, and the value of annual stock grants. Most likely, anyone who owns and maintains a qualified Long-Term Care Insurance policy can opt out of the tax.
While there's some debate around permitting an annual opt-out for residents who acquire qualifying Long-Term Care Insurance coverage, sources indicate that the likelihood of this provision being included in the final legislation is slim. However, California may allow a brief window for residents to secure Long-Term Care Insurance to avoid the tax similar to what Washington allowed.
In addition to California, Illinois, Michigan, Minnesota, and New York, the other states that are beginning the discussion process of enacting their own LTC Tax include:
- New Hampshire
- New Mexico
- North Carolina
- North Dakota
In New York, Senate Bill s9082 proposed the establishment of the New York Long-Term Care Trust Program. Introduced in 2022, this bill would impose a payroll tax to finance a long-term care trust, mirroring the model of WA Cares.
As per the proposed legislation, New York workers can only opt out of this new payroll tax if they possess a private long-term care insurance policy by January 1 of the year the law is enacted.
The issue has stalled in New York, but sources in Albany told LTC NEWS that supporters seem to have enough support to move forward in the future. As proposed, the only way for workers in New York to opt-out of this new payroll tax is to own a private long-term care insurance policy no later than Jan. 1 of the year the law is passed.
A significant distinction between New York's proposition and WA Cares is that New York's plan would tax workers based in the state, irrespective of their state of residence. This could affect workers residing in Connecticut, New Jersey, and Pennsylvania. Additionally, in contrast to WA Cares, New York's long-term care benefit would be portable, allowing workers to avail of the benefit nationwide.
In Minnesota, lawmakers have drafted a bill resembling the Washington Cares Fund. The proposed legislation stipulates the provision of 365 Benefit Units, each valued at $100, to eligible beneficiaries for payment to qualified providers. This benefit would be financed through a state payroll tax specifically allocated for long-term care.
Most states will allow for some exemption from the tax if a resident already has a qualified Long-Term Care Insurance policy in place. However, most states may require a policy to be in place prior to the enactment of the law. Unlike in Washington, residents of these states may not have time to get coverage once the bill becomes law.
Younger Workers Must Pay Tax
While most experts suggest planning for the costs and burdens of aging as part of retirement planning, the tax in these states may force people, even younger ones, to obtain coverage. Otherwise, these individuals will pay a tax for the rest of their lives.
Younger individuals anticipating a higher lifetime earning potential should consider procuring coverage immediately. There are several traditional Long-Term Care Insurance options available, but life insurance policies featuring a qualifying rider for long-term care — meeting the legal requirement under Section 7702(b) of the U.S. Code — are reasonably priced and available to those as young as 18. These life policies cater to a crucial life insurance need and offer a qualified long-term care benefit, exempting them from the LTC tax.
Remember that long-term health care services come with high costs, which escalate annually. Traditional health insurance, including Medicare and supplemental plans, does not cover these expenses.
The LTC NEWS Cost of Care Calculator shows the current and expected future cost of care services nationwide based on the major cities throughout each state.
When securing LTC Insurance coverage, experts suggest avoiding settling for the most basic plan. Obtaining an affordable Long-Term Care Insurance policy protects your income and assets from the exorbitant costs of long-term health care. But the benefits extend further. You'll gain access to your preferred quality care services, including in-home care, thereby alleviating any potential strain on your family. Consider it a form of protection for your 401(k) and other retirement accounts.
Select a Qualified Policy That Meets Federal Code 7702(b)
Since there may be little or no advance notice before a state enacts a tax, don't delay obtaining coverage. You must have a tax-qualified Long-Term Care Insurance policy following Section 7702(b) of the U.S. Code.
Seek the assistance of an experienced Long-Term Care Insurance specialist representing the top companies. Premiums can vary over 100% between companies for the same coverage. LTC Insurance is medically underwritten. The specialist will match your age, health, and family history with the right company and provide accurate quotes from all the top insurance companies - Find a Qualified Independent LTC Insurance Specialist.
Obtaining the smallest plan possible that gets you out of the tax might be tempting. It would be wise to avoid getting the cheapest available plan unless you have little income and don't expect to earn more in the near future.
You can replace or add to your coverage when you start earning more income, but remember, the coverage would be priced based on attained age and health.
Some LTC Insurance policies lack inflation benefits and are not partnership certified. These two items are essential to have in a policy. Few employer-sponsored plans exist, and those that do are usually not your best option for long-term care planning unless you have health issues limiting your choices or want something that eliminates the tax at the lowest cost possible.
No New Federal Plan on the Horizon
It is advisable to avoid delaying action while waiting for Washington DC's intervention. Although President Biden has discussed enlarging tax incentives for policy purchases, there's minimal support within Congress to advance beyond their current actions.
Even though there have been suggestions to implement a nationwide plan, they've garnered scant support. Various strategies have been put forth, ranging from a national long-term care plan to permitting the penalty-free use of qualified retirement funds to cover LTC Insurance premiums.
Federal Tax Incentives Exist. Partnership Plans in Most States Available
The existing federal tax benefits will continue. The Long-Term Care Insurance Partnership program provides further asset protection on a dollar-for-dollar basis when you own a qualifying plan, with most states participating in this program.
The prospect of needing long-term health care is a genuine reality at some point in life, and states don't have the financial capacity to cover everyone's future care. Thus, preparedness is advisable, regardless of tax considerations.
During a speech on October 28, 2021, President Biden acknowledged that the millions of Americans in the so-called "sandwich generation" often feel the financial strain of simultaneously raising a child and caring for an aging parent.
To describe this as a family crisis would not be an overstatement. The impact of long-term health care is significant. Caregiving is tremendously emotionally, physically, and financially challenging for family members who are forced to become caregivers.
Remember that Long-Term Care Insurance is subject to medical underwriting, so it's wise to acquire coverage quickly when still in good health. Postponing could potentially affect not only your state's tax situation but also your insurability.
States are striving to find solutions to the escalating challenge of aging and long-term care. Many experts anticipate that more states will establish similar long-term care tax programs in the upcoming years. In the meantime, taking proactive steps in planning is strongly recommended for you and your family so you can prepare for the costs and burdens of aging. A comprehensive retirement plan for many Americans should include Long-Term Care Insurance.
About the Author
Contributor since April 22nd, 2021
The U.S. Department of Health and Human Services says the likelihood of anyone who reaches the age of 65 needing long-term health care services is about 50/50.
When we get older, we see changes in our health. Our bodies change as well as our minds decline. Aging happens. Preparing our families and finances for the costs and burdens of aging should be something we do as part of retirement planning, not just because we want to avoid a tax.
With twelve new states considering new tax plans on those who do not own Long-Term Care Insurance, and others sure to follow, getting ahead of the curve is critical. You can take advantage of your current good health, and premiums are based, in part, on your age, health, family history, and the amount of benefits in your policy. Planning now will not only save you money and help you avoid any tax, but you will also safeguard your income and assets from the consequences of longevity.
Planning Tools and Resources on LTC NEWS
You can find many tools and resources on LTC NEWS to assist you in your research for a planning solution or help your family find the appropriate care for a loved one at the time of crisis.
To help you plan the costs and burdens of changing health and aging, LTC NEWS has put in place several resources, including:
The LTC NEWS Cost of Care Calculator will show you the current and future cost of long-term health care services where you live. Plus, each state has vital state-specific information you should know - Cost of Care Calculator - Choose Your State | LTC News
The Ultimate Long-Term Care Guide is an outstanding read to help you get a good overview of the topic area.
Compare the major insurance companies that offer Long-Term Care Insurance products here - Top Insurers for Long-Term Care Insurance | LTC News.
A detailed tax guide that includes available tax incentives can be found by reviewing the Long-Term Care Tax Benefits Guide.
Find all the resources on LTC NEWS - Resources for Long-Term Care Planning | LTC News.
Seek Professional Guidance
Insurance rates are regulated, so no insurance agent, agency, or financial advisor can give you special deals. However, insurance companies' premiums vary over 100% for the same coverage.
Experts suggest using a qualified Long-Term Care Insurance specialist to help you navigate the many options available to you and your family.
A specialist who works with the top companies can match your age, health, family history, and other factors and find you the best coverage at the best value. A specialist will save you money, and you will have peace of mind knowing they are making the appropriate recommendations - Work With a Specialist | LTC News.
Finding Quality Care for Mom or Dad
Start by reading our four guides -
If they are lucky enough to own a Long-Term Care Insurance policy, be sure they use it. Sometimes families wait, thinking they can save the benefits for a rainy day. Waiting on using available Long-Term Care Insurance benefits is not a wise idea.
Get Help in Filing a Long-Term Care Insurance Claim
Quality care obtained early will help provide a better quality of life and reduce the risk of a deep decline and facility care. If you need help in starting the process of a Long-Term Care Insurance claim, LTC NEWS can help.
LTC NEWS provides free assistance with no obligation to help you or a loved one complete the claims process with a Long-Term Care Insurance policy. We have teamed up with Amada Senior Care, who will do all the work, free with no obligation.
You can also get support in finding quality caregivers and get recommendations for a proper care plan, whether a person has a policy or not. - Filing a Long-Term Care Insurance Claim | LTC News.
Benefits of Reverse Mortgages
Today's reverse mortgages for those aged 62 and older could be an ideal resource to fund a Long-Term Care Insurance policy OR even provide money to pay for care if you, or a loved one, already needs help and assistance.
Some people have much of their savings invested in their homes. With today's reverse mortgages, you can find ways to fund care solutions, care itself, even help with cash flow during your retirement.
Learn more by asking questions to an expert. Mike Banner, LTC NEWS columnist and host of the TV Show "62 Who Knew" will answer your questions regarding caregiving, aging, health, retirement planning, long-term care, and reverse mortgages.
- Just "Ask Mike." - Reverse Mortgages | LTC News.
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