A Primer on CA's Potential Long Term Care Program and Payroll Tax

A Primer on CA's Potential Long Term Care Program and Payroll Tax

October 20, 2023

The state of California has created a “task force” to recommend options for establishing its own state long term care insurance program and a potential additional payroll tax.  This task force submitted a feasibility report to state leaders on December 23, 2022, and is currently undergoing an analysis by the California Department of Insurance.  Here is a quick update.  

Why is this important to you?

If this Assembly Bill (“AB”) 567 is passed, it would require wage earners to pay an income tax of a proposed 0.40% to 0.60% of earnings to cover the cost of a state funded program.  This tax would fund the public long-term care plan for the state.

When is the enactment date?

Currently, the proposed Bill has an effective date of January 1, 2025.

Could I purchase a private Long-Term Care (“LTC”) policy to exempt me from the tax?

Many clients may already have LTC or an insurance policy with an LTC rider. The state of California could include an opt-out provision, no opt-out or a lower tax option if a policy is purchased before the program is enacted.  The “task force” has recommended that residents who have a qualifying private LTC policy be able to opt out of the public program, which would not subject the resident to a payroll tax. 

Is there an income cap?

Currently there is no income cap and current feasibility reports have proposed 0.40% - 0.60% or a progressive payroll tax up to 2% of wages.

Is the tax paid by my employer?

There is the possibility of both employer and employee contributions but is dependent on a company-by-company basis.  Otherwise, the employee pays the tax.

Is there a lookback if AB 567 is passed and proposed with a start date of January 1, 2025?

Yes, preliminary recommendations include a 12-month lookback for private coverage to apply for an opt out exemption.  This would mean to opt out that private policies must be in place by January 1, 2024.  However, the Legislature has not made any decisions and there is no opt out date currently. 

Have other states instituted this tax?

Yes, the state of Washington enacted a law in 2023 requiring employers to begin collecting a 0.58% payroll tax.  Washington’s plan (WA Cares) allowed employees to opt out of the payroll tax if they had a private LTC policy in place as of a certain qualifying date.  Each individual had to attest to the state online that they had other coverage and receive an approval letter.  Those who successfully obtained this exemption are permanently exempt from WA Cares.  After that date, they could not opt out.  This opt out provision is no longer accessible for new applicants.

Flatrock is actively monitoring the proposed bill and will actively engage with our clients based on their current financial plan.[i]  Please contact us if you would like to discuss various planning scenarios. 

[i] As a reminder, Flatrock does not sell insurance policies