Long-term care (LTC) services are expensive and many Americans don’t have enough savings to cover the growing costs. Some U.S. states are responding by establishing payroll taxes to fund public benefit pools.

Overview

With people living longer and labor constraints contributing to a sustained increase in already high care costs, the need for long-term care coverage continues to grow. Medicare, Medicaid, and other federal programs cover 72% of long-term care costs, according to a June 2022 report by the Congressional Research Service. That leaves a substantial portion for cash-strapped households and an insurance market still reeling from years of significant losses.

Legislative Impact on LTC

In July 2023, Washington state will become the first U.S. jurisdiction to establish a public LTC pool (WA Cares Fund) funded by a special payroll tax. However, individuals who had their own qualifying LTC policy in place by November 1, 2021, will be allowed to opt-out of WA Cares and its payroll tax. Opting-out was especially popular among the following groups of people:

• younger residents able to purchase private policies at attractive premiums
• high earners who stood to pay the most under the uncapped payroll tax
• anyone interested in retiring outside of Washington state (because benefits won’t be paid to non-residents, even those who contributed when they were residents)

The state has already received significantly more opt-out applications than anticipated, putting pressure on the fund’s original financial projections.

At least 13 other states are watching the Washington rollout with interest as they look for ways to help their own residents cope with long-term care expenses and de-risk their Medicaid programs. Most notably, California is currently evaluating several proposals for a statewide LTC fund modeled after WA Cares and with legislation possible as early as the end of this year.

It is important to note that the payroll tax in Washington is only applicable to employment income (i.e., earnings that would be reported on a Form W-2) so it would not impact equity partners at most law, accounting or consulting firms. However, it is unclear what types of earnings will be taxed in the proposals being evaluated in California.

Professional service firms and their benefits advisors are proactively evaluating potential long term care coverage options before legislation is passed in states where their employees reside.

Long-Term Care Solutions

A decade ago, a robust LTC market featured guaranteed issue and group policies. However, insurance carriers mispriced the LTC product by failing to account for the prevalence of the need for care and rapid rise in costs. As a result, many carriers pulled out of the market. What remains today are hybrid life Insurance policies with LTC riders.

A life insurance policy with long term care coverage allows a portion of the death benefit to be used for LTC costs while the insured is alive. If the insured employee or covered family member doesn’t need long term care, the policy works like an ordinary life insurance policy and pays out a death benefit to the designated beneficiary.

The policies also help insured employees and covered family members if they need additional services, such as skilled nursing or in-home professional care. Policies like these tend to be rate stable, meaning premiums do not increase year-over-year. Life with long term care offers the best of both worlds, a hybrid product that covers LTC costs when employees need it and a death benefit when they don’t.

How to Deliver Life with LTC

Ultimately, the success of a life with long term care benefit depends on how well firms understand, plan for, and communicate the benefit. An effective communications campaign, educational webinars, and even benefit counselor support are all tools to help employees make informed benefits and financial planning decisions.

Contact

For more information about long-term care and how Aon can help, please send an email to [email protected] or reach out directly to Mark Scarafone or Jake Delman.





Mark Scarafone
Senior Vice President and Health & Benefits Leader
Radnor, PA







Jake Delman
Senior Consultant
Washington, DC

The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.