Long-Term Care Tax California

A recently proposed payroll deduction may soon impact the take-home pay of California workers, including the self-employed. Even residents of neighboring states, like Arizona, Nevada, and Oregon, who work in California, might be subject to this payroll deduction.

You may want to consider purchasing a private long-term care insurance policy before the potential exemption deadline to be exempt from the long-term care tax California.

California Assembly Bill AB567 created a long-term care insurance task force to “examine the components necessary to design and implement a statewide long-term care insurance program.” The program will be similar to Washington state’s “WA Cares Fund,” which was finalized in April 2021. A federal judge recently upheld Washington State’s program, and Washington State began collecting the payroll deduction on July 1st. 

Washington is the first state to establish a social insurance program to help fund long-term care. After a vesting period, “WA Cares Fund” participants will be able to receive $36,500 of long-term care benefits over their lifetime (adjusted for inflation). In addition to Washington and California, thirteen other states, including New York, are beginning to develop similar programs.

The Washington law allowed anyone to opt out of the payroll deduction if they owned a private long-term care insurance policy. In the first version of the law, signed in 2019, there was a 20-month window from April 30, 2021, through December 31, 2022, to buy a private long-term care insurance policy and opt out of the program. The second version of the law reversed that. It only allowed employees to opt out if they had already owned a long-term care insurance policy before the law was signed in 2019. In the final version of the Washington state law, there was a six-month window to buy a private long-term care insurance policy to opt out of the payroll deduction. That window lasted from April 30 to October 31, 2021

Over 480,000 employees in Washington state purchased private long-term care insurance during that six-month window and opted out of the payroll deduction. Because of the one-time opt-out, the state of Washington will lose hundreds of millions of dollars of revenue every year. The WA Cares Fund payroll deduction is uncapped. It equals .58% of all W2 wages, including salary, stock options, employee stock purchase plans, and cash bonuses. According to a study by the state of Washington, the average income of those who opted out was over $200,000 per year. For high-income earners, the cost to own a small, private long-term care insurance policy was less than the payroll deduction of .58%

California’s Long-Term Care Insurance Task Force has created five different program designs to be considered by the California legislature. All five designs require a “payroll tax (split between employees and employers) and a non-voluntary premium contribution via an income tax for the self-employed.” Three of the five designs have significantly richer benefits than Washington State’s program. The actuary on the Task Force estimated that the program design preferred by the Task Force would require a payroll tax of no less than 2.0% and possibly as high as 3.5%.

To avoid a similar shortfall in California, the Task Force recommends that the California legislature NOT allow any window for California workers to opt out of the program. 

In their report to the legislature, the Task Force stated:

“While including a time-limited opt-out window would increase flexibility for prospective private insurance consumers, a surge in private insurance applications would likely occur in the months leading up to the deadline, similar to what happened with the WA Cares Fund. To mitigate this outcome, legislation enacting the Program should set a deadline (e.g. the date the Governor signs the legislation), which would make any new LTC policy sales ineligible for Program opt out after the deadline.”

The Task Force discussed five different “opt-out deadlines” and favored two:

1. The program effective date (estimated to be January 1st, 2025) OR
2. The beginning of the year preceding the Program effective date

If the legislature chooses #2, and the program effective date is January 1st, 2025, the deadline for purchasing a long-term care insurance policy would be January 1st, 2024. 

Unlike Washington state, the Long-Term Care Tax California will not have a long window of opportunity to purchase a long-term care policy to opt-out of the Program.
What will the final version of Long-Term Care Tax California look like? Will the deadline for owning long-term care insurance be January 1, 2024? Will it be October 1st, 2024 (the governor’s estimated date to sign the bill)? Or will it be January 1, 2025 (the estimated effective date)? Or will it be after that?

No one knows for sure.

If you have an above-average income, the safe bet may be to buy a small long-term care insurance policy before the law is finalized. It could be too late if you wait until after January 1, 2024.

What is Long Term Care?

There are many different services that would fall under the definition of long-term care. These services include institutional care in nursing facilities or non-institutional care such as home health care, personal care, adult day care, long-term home health care, respite care and hospice care.

• Nursing homes in California are licensed under the Public Health Law.
• Home health care consists of services received in your home, and can include skilled nursing care, speech, physical or occupational therapy, or home health aide services.
• Home care (personal care) consists of assistance with personal hygiene, dressing or feeding, nutritional or support functions, and health-related tasks.
• Adult daycare can provide supervision and other social, recreational, and in some cases, health services during the day, in a group setting outside the home, for elderly persons who still live at home.
• Assisted living facilities provide housing and ongoing care and services to those unable to perform activities of daily living or who have a cognitive impairment.
• An alternate level of care is care received as a hospital inpatient when there is no medical necessity for being in the hospital and is for those persons waiting to be placed in a nursing home or while arrangements are being made for home care.
• Respite care is temporary institutional or at-home care of a dependent elderly, ill, or handicapped person, providing relief for their usual caregivers.
• Hospice care is a program of care and treatment, either in a hospice care facility or in the home, for persons who are terminally ill and have a life expectancy of six months or less.

Will I Need Long-Term Care?

The chances of needing some type of long-term care services is high. It is estimated that over 40% of all persons who were 65 years old in 1990 will enter a nursing home during their lifetimes.