By James Rosa, CPA, PFS
HBK CPAs & Consultants, Principal
In the realm of fiscal uncertainties, one glaring example stands out: the precarious state of Social Security. As workers diligently contribute to this safety net, the harsh reality revealed in the 2023 OASDI Trustees Report looms ominously: within a decade, retirement benefits could face a staggering 25 percent reduction. This sobering truth, widely acknowledged, serves as a stark reminder of the fragility of our financial systems.
But amidst this well-known dilemma lies a lesser-known threat, a new contender vying for a slice of your hard-earned income: state-based long-term care programs. While Social Security’s woes may seem daunting, the cost-benefit dynamics of state initiatives paint an even bleaker picture. Following the example set by the State of Washington, nineteen states, including New York, are contemplating implementing a tax on individuals who are not covered by a qualifying long-term care insurance policy.
For high earners in New York, this program appears a losing proposition from the outset. Unlike Social Security, where eventual benefits may outweigh contributions over time, the New York State LTC Trust Program presents a starkly different scenario. As we delve deeper into this fiscal landscape, it becomes evident that navigating these treacherous waters requires astute planning and proactive measures.
New York’s proposed program
New York has proposed a Long-Term Care Trust Program to address the issue of long-term care insurance through a mandatory payroll tax. Washington was the first state to adopt such a plan; New York and other states including California, Illinois, and Pennsylvania are considering similar programs.
The New York proposed legislation includes a new payroll tax on employees to be paid into the state’s long-term care fund. This is an employee tax, though it will require administration by employers to withhold the taxes. Self-employed individuals could voluntarily elect the coverage and pay the tax.
In Washington state, employers scrambled to find a long-term care solution to help employees avoid the tax and receive a more benefit-rich option using employee-funded, payroll deducted solutions. The time to consider possibilities is now.
The effective date of New York’s pending payroll tax, which may range from .5 percent to 1 percent, is yet to be determined, as the proposed legislation has not yet been passed.
Opt-out requirements
Employees can opt out of the state coverage and the payroll tax by proving they have their own long-term care coverage. In Washington state, people were able to purchase private long-term care policies after the statute was passed. However, the proposal in New York would require that private long-term care insurance would have had to be purchased prior to January 1 of the year the law is passed. As such, if the long-term care law is passed in 2024, private long-term care insurance would have had to have been purchased before January 1, 2024. If the law is passed in 2025, private insurance could be acquired before January 1, 2025.
What are the benefits?
The program would pay a lifetime benefit cap of a hundred dollars a day for one year ($36,500). The payments could be used for such items as:
- adult day care
- memory care
- adaptive equipment
- environmental modification
- personal emergency response system
- home safety evaluation
- respite for family caregivers
- home delivered meals
- transportation
- dementia support
- education and consultation
- eligible relative care
- assisted living
- adult family home services
- nursing homes
Benefits would be paid directly to a registered long-term care provider. Benefits would not be paid to the ill individual. Family members who provide approved personal care services would be eligible for payment. Benefits would not be considered income or resources for state financially tested programs such as Medicaid.
The lifetime benefit of $36,500 is modest, only a fraction of the cost for the most seriously ill. The benefit is most appropriate for those in the early stage of illness when the needs are less. High-wage earners could pay more in payroll tax than they could receive in the lifetime benefit. Someone who earned $600,000 per year and paid $45,000 in tax over a 10-year period (assuming a .75 percent tax rate) could receive a lifetime benefit of no more than $36,500, a losing proposition even before considering lost opportunity costs.
Private LTC
If the states are going to impose an LTC tax with a one-size-fits-all plan, why not consider putting your own plan in place, one you can customize to fit your employees’ needs, one that allows them to opt out of the state tax in the process? Advantages include:
- More options: Linked benefit, traditional, and life insurance riders are all choices when considering a plan for LTC. These plans offer a wide range of benefits, making it possible to fit most budgets.
- Better control: Most private plans offer home and facility care, giving policyholders flexibility when it comes to where and when they receive care. Providers will be more willing to work with clients with LTC coverage.
- Premium guarantees: Linked-benefit plans offer guaranteed premiums, while traditional LTC premiums are guaranteed renewable. This means premiums can’t be changed when a policyholder’s health changes. And many policies waive premiums when a policyholder goes on claim.
- Inflation protection: Many plans offer the ability to increase benefits in an effort to keep up with inflation.
Conclusion
As stewards of our clients’ financial future, our team at HBKS Wealth Advisors stands ready to help you navigate these issues to avoid or mitigate costs that do not provide reasonable benefits. We are able to assist in determining what options are available. Please contact your HBKS Financial Advisor to discuss your options.
IMPORTANT DISCLOSURES
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
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