California Proposes Payroll Tax to Fund Long Term Care Benefit

Updated as of 9/28/2022

The nation’s most populous state has taken preliminary steps to implement a payroll tax. The California payroll tax may fund a small amount of state-provided long term care (LTC) coverage, but there are many questions about what the legislation might include. While we await more specific information about this proposed California payroll tax legislation, we already have experience based on a similar process implemented in 2021 in Washington State. This can help inform strategies for individuals interested in exploring their private LTC insurance options.

In this article, we provide insight and make assumptions based on the California Long Term Care Insurance Task Force preliminary recommendations to be finalized prior to January 1, 2023. Summary slides of the task force recommended program benefit designs as of August 3, 2022, can be found here.

We’ve outlined some key takeaways from the California Task Force recommendations along with corresponding differences from the Washington law.

  • The proposed CA benefit designs vary from $36,000 of coverage up to $144,000 for the most comprehensive option. In comparison, the cost of care for a 3-year long-term care claim event projected out in 30 years is around $1,000,000. In WA, the amount of coverage was $36,500 with nominal increases.
  • The California payroll tax is expected to be priced based on how comprehensive the program design is. In WA, the payroll tax is 0.58% of annual wages including income, bonuses, vacation time, and the value of annual stock grants.
  • The CA tax may be split between employer and employee – unlike WA which places the burden of the tax on the employee.
  • The CA tax may also allow an opt-out provision if the employee has a private LTCi policy. It is unclear yet the rules for exemption for someone currently owning or newly purchasing a qualifying long-term care insurance policy. In WA, the definition of LTC insurance was broadly defined to include both traditional and hybrid products with LTC riders.
  • Regardless of how the exemption is structured, if a CA employee wants to purchase private insurance, they may want to start the process before any final state announcements are made. This could help avoid the rush for long term care insurance coverage that we saw in WA.
  • There are slightly fewer group and individual products and carriers in CA than in WA, mostly because product approvals from the state take longer. However, there is still a robust market of options available if coverage is obtained before the expected increase in demand if a law gets enacted.
  • There are approximately 16,500,000 employees in CA, more than four times the number in WA. BuddyIns expects the capacity of both individual and group products with qualifying LTC riders in California to be very limited.

 

START YOUR LONG TERM CARE PLAN NOW

Now is the time to begin the process of obtaining meaningful long term care insurance (LTCi) coverage. Why? Because as we experienced in Washington if the state announces the implementation of the payroll tax, insurance companies may be quickly inundated by LTCi applications. In Washington, that led many companies to exit the state in the face of high demand, creating a temporary shortage of available solutions.

Another reason to start the process of obtaining coverage is that planning early may result in the best value solution. The best value for LTC insurance is typically obtained at younger ages and when in your best health. Waiting could mean that the premium costs are higher, or a health event may make you ineligible for insurance. Why pay more for something that you can get at a lower cost now?

 

A LIFE INSURANCE OR LONG TERM CARE PRODUCT THAT FITS YOUR NEEDS AND BUDGET

At BuddyIns, we recommend obtaining meaningful coverage. What does that mean for you? Meaningful coverage provides the insurance benefits that may best cover the risks you believe will impact you. The cost is affordable, and it is a plan that you can financially manage over your lifetime. The most popular solutions in Washington came from not only affordable LTCi-focused coverage but also life insurance coverage with LTC riders. Younger clients who did not have their life insurance plans used the WA payroll tax as an opportunity to protect their families with affordable hybrid policies.

The ideal candidate to purchase long term care insurance or life insurance is someone who would have pursued coverage regardless of the tax. They may now decide to buy sooner than they would have because of the new government program and the ability to opt-out or supplement the limited state benefits.

Higher earners with more income and assets to protect may see the best value from purchasing a private plan that may also provide the benefit of being exempt from the payroll tax. If the payroll tax is a percentage of all wages, like in WA, a higher earner could pay more into the payroll tax than they could get in benefits.

For example, a 40-year-old employee is making $200,000 per year and expects her wages to grow 3% per year. If she retires at age 65, she will have put in a projected $42,293 over 25 years. If the lifetime maximum is similar to the Washington State benefit, it will be around $36,500 with nominal increases.

As California proposes a payroll tax and considers an exemption to the tax to pay for a minimum long term care benefit, your private long term care insurance policy may provide the coverage you need to satisfy the exemption requirements. Reach out to a long term care specialist to begin the planning process. Even if you are not ready to purchase yet, understanding your options and meeting with an LTCi specialist will allow you to act more quickly later.

>>Learn About Other States Considering a Long Term Care Payroll Tax

 

LONG TERM CARE INSURANCE-FOCUSED SOLUTIONS

Traditional Long Term Care Insurance or Life Insurance Hybrids with LTC Extension

Let’s look at some numbers by considering another 40-year-old CA employee. This employee decides he wants to purchase traditional long term care insurance. He anticipates needing care at age 80. In this scenario, he could obtain a policy with 6 years of protection to provide a total maximum benefit of $1.1 million of tax-free LTC benefits. California has some of the highest costs of care in the country. These additional benefits could be the difference between maintaining control over his care and leaving it to his family to determine where he receives his care and how that care is paid.

The chart below is created using BuddyIns proprietary software. It reflects the impact of purchasing long term care insurance vs. self-funding a long term care event that begins at age 80.

  • Traditional LTC Pie Chart: The “Insurance Multiplier” or the maximum amount of coverage one might receive relative to the premium at age 80. It reflects the total premiums paid versus the total long term care benefits.
  • Self-Funding Pie Chart: Reflects self-funding the total amount of care. Self-funding assumes a person earns a 5% rate of return on their savings and incurs a 20% tax rate if the investment returns result in taxable gains.

 

 

Traditional long term care insurance is not the only option when it comes to long term care coverage. Some hybrid options can provide excellent LTCi coverage with extension of benefits features, flexibility in the use of cash values, and a death benefit for family or another beneficiary if care is not needed.

Hybrids can be designed in several ways and may offer the ability for our employee above to change his mind on the coverage later. That allows him to retain some or all the value of the premiums already paid into the policy.

Don’t worry. You do not have to figure all of this out on your own. A long term care insurance specialist can help find the product that is a good value for you and for which you may qualify depending on your health.

>>Your Guide to Long Term Care Insurance

 

LIFE INSURANCE-FOCUSED SOLUTIONS WITH LTCI FEATURES

Permanent Life Insurance with LTC Acceleration or Term Life with Conversion Options

For those who desire life insurance, several popular options on the market also include true LTC riders. These solutions include permanent life insurance like universal or whole life, which have unique features and benefits at affordable rates, especially for starter plans.

While there are limited or no term life policies with true LTC riders, some strategies may allow for the desired coverage today with the flexibility to convert to a permanent product and add the LTC rider later.

You can choose to maximize your life insurance death benefit with term insurance or maximize the flexibility and cash values with permanent insurance. You may also do both while retaining the option to receive “living benefits” in the form of an LTC benefit that may qualify for the payroll tax opt-out.

This option might be a great choice if you are younger and have a greater life insurance need.

The deadline for purchasing private coverage is still unclear or even if there will be an opt-out with certainty. Whether or not the payroll tax comes into effect, if you purchase the coverage you need while all your options are on the table, that can be a win regardless of how the law plays out.

 

START NOW TO OPTIMIZE YOUR CHOICES REGARDLESS OF THE CALIFORNIA PAYROLL TAX

The great news is that approximately 85% or more of working employees should be able to obtain coverage from one of the insurance products on the market. Starting the process sooner rather than later can provide you with the most options and peace of mind. We highly recommend that you begin your process by speaking with a long term care specialist.