By Richard Birmingham and Christine C. Hawkins
01.18.23 - Davis Wright Tremaine
As discussed in prior advisories, following a class action lawsuit challenging Washington State's Long-Term Services and Supports Trust Program (now called "WA Cares") and legislative changes and delays, WA Cares is again set to go into effect on July 1, 2023. WA Cares will require employers to withhold a payroll tax equal to .58 percent of certain employee wages unless the employee has provided a state-issued letter of exemption to their employer prior to July 1. With July 1 approaching, and no further delay in sight, employees and employers must prepare for the new state tax. This advisory examines the background of WA Cares and outlines steps for legal compliance. Stay tuned for more DWT advisories in our WA Cares series, including projected underfunding and expected challenges to WA Cares going forward.
To read our previous advisories, see:
In Spring of 2019, WA Cares, codified at RCW 50B.04.010, was passed into law as the first state-enacted long term-care program in the United States. The benefits under WA Cares are funded solely by employee wage deductions, with employers responsible for deducting a .58 percent premium and remitting the premium to the Washington State Employment Security Department ("ESD").
WA Cares went largely unnoticed until 2021, when employers and employees alike became aware of their administrative and financial obligations under the program. As enacted, and originally scheduled to begin January 1, 2022, all employees employed in Washington State were subject to the premium with the exception of self-employed individuals, employees of federal tribes, certain collectively bargained employees, and those who purchased private long-term insurance to quality for a one-time limited exemption.
In November of 2021, DWT filed a class action lawsuit on behalf of employers and employees challenging WA Cares on the grounds that it violated ERISA and other federal laws. Pacific Bells, et. al. v. Inslee. Following the filing of the lawsuit, members of the legislature rushed to fix certain perceived problems with the program and, on January 26, 2022, the legislature passed House Bill 1732 and House Bill 1733. As discussed in our prior advisory, the bills delayed premium collections to July 1, 2023, delayed benefits to July 1, 2026, provided for limited relief for employees within 10 years of retirement, and expanded exemptions for certain groups of employees. Significantly, while these changes are projected to increase the costs of the program, the bills did not amend the .58 percent premium rate to address underfunding. The federal court ultimately dismissed the Pacific Bells case, holding that the court lacked jurisdiction to hear a challenge to a state tax. To date, no similar challenge has been filed in state court.
What is the WA Cares premium rate? Washington State has now indicated that the .58 percent premium is intended to be a state tax on employee wages, not a premium. By law, the tax rate is capped at .58 percent of wages and cannot be increased.
What do employers need to do? Beginning July 1, 2023, employers must withhold a "premium" of .58 percent of an employee's wages unless the employee has provided the employer with a state-issued exemption letter. Once an exemption letter is received, the employer must stop withholdings from the employee by the effective date of the letter (or immediately if provided after the effective date of the letter). If the employer continues to withhold after the effective date, the employer is liable to the employee, but the state is not obligated to and will not return any funds improperly withheld.
Which employees are subject to the tax? All employees who are employed in Washington State are required to pay the WA Cares tax. There are exceptions for self-employed individuals, employees of a federal recognized tribe, employees of the federal government, and employees who qualify for an exemption (see below). The application of WA Cares is also delayed for certain collectively bargained employees. For purposes of WA Cares, an employee is treated as employed in Washington if the employee's service is localized in Washington or, if the service is not localized in any state, the employee performs some services in Washington and the services are directed or controlled from Washington. (Note: The statute defines "employment" in the same manner as the Washington Paid Family and Medical Leave (PFML) program. Thus, employees subject to PFML will also be subject to WA Cares.)
Is there a cap on wages that are subject to the tax? Unlike other state programs, such as PFML, there is no cap on the wages that are subject to the tax. All wages and remuneration, including stock-based compensation, bonuses, paid time off, and severance pay are subject to the tax. For example, an employee with annual wages of $65,000, will be assessed a tax of $377 per year for WA Cares, while another employee who is the same age with wages of $250,000 will pay $1,450 per year for WA Cares.
What employees are exempt from the tax? With the exception of self-employed individuals and employees of federal tribes, employees who qualify for an exemption and wish to opt out must apply to and receive an exemption from ESD and provide the state-issued exemption letter to their employer. There are two exemption pathways:
Unlike the previous exemption pathway, which had a deadline to apply, these exemptions became available on an ongoing basis on January 1, 2023. If an employee's status changes so that the requirements of the exemption are no longer met, the employee must notify both ESD and their employer within 90 days of their status change. If the employee fails to timely provide the notice, the employee is liable for the premium plus interest at the rate of one percent per month. Veterans with a 70 percent service-connected disability rating or higher receive a permanent exemption.
Can self-employed individuals or federally recognized tribes opt-into WA Cares? Self-employed individuals and all employees of a federally recognized tribe are automatically exempt from WA Cares. To participate in WA Cares, self-employed individuals may opt-in no later than July 1, 2026, or within three years of becoming self-employed for the first time. Once elected, a self-employed individual cannot withdraw from coverage. A federally recognized tribe may opt into or out of WA Cares at any time.
Is there separate relief for union employees? Parties to a collective bargaining agreement in existence on October 19, 2017, are not subject to WA Cares unless and until that agreement is reopened, renegotiated or expires. Parties must notify ESD when the collective bargaining agreement becomes open. In 2023, this delay is unlikely to provide relief for many union employees as most agreements will have reopened since October 19, 2017.
When will benefits become available? Benefits are now first payable on July 1, 2026.
What benefit does WA Cares provide? If eligible, and if the Department of Social and Health Services determines that an individual requires assistance with at least three activities of daily living, WA Cares provides benefits of up to $100 day, up to a maximum lifetime limit of $36,500.
Who qualifies for WA Cares benefits? Full benefits are available only to Washington residents who have paid the tax for: (1) ten years without interruption of five or more consecutive years; or (2) three of the last six years before the application for benefits is made.
Employees who were born before January 1, 1968, and who have not satisfied these requirements will now receive a pro-rated benefit (10% of the benefit amount for each year the tax is paid) if they have contributed to WA Cares for at least one year.
Note: To be counted as a year of premium payment, the individual must have worked at least 500 hours in such year.
For now, employers and employees should prepare for wage withholdings to begin July 1, 2023, with the WA Cares tax remitted to ESD in the same manner as PFML contributions. Employers and employees may also wish to consider whether WA Cares should be challenged in state court. DWT is closely following a Washington Supreme Court case scheduled for oral argument on January 26, 2023, that could shape arguments regarding the legality of WA Cares as a tax. Stay tuned for more in Part 2 of DWT's WA Cares series as we explore the funding concerns and other legal challenges to the program.
* This has been updated to correct a typo: the word 'employees' was changed to the word 'employer.'