Recertification Proposals Add to Confusion Over WA Long Term Care Payroll Tax Exceptions

We previously blogged about the WA Cares Act, a law creating a public long term care benefit for certain Washington employees. Under the law, employees pay a payroll tax in exchange for access to future long term care payments. Employees could opt out of the law by obtaining private long term care insurance coverage. The deadline to opt out expired December 31, 2022.

A federal court largely dismissed a lawsuit challenging the act in 2022, theoretically clearing the way for the law to go into effect.

But the Washington State legislature put the law on hold while it made some changes. The law softened the requirement that a person have paid the tax for ten years before becoming eligible for benefits. Persons born before January 1, 1968, can access limited benefits as long as they pay the tax for at least one year. This was done to avoid the unfair result of persons within ten years of retirement age the date the Act becomes effective being deprived benefits.

The updates also expand who can opt out of the Act. Now, certain veterans, spouses of military service members, persons who live outside Washington but work in Washington, and persons working temporarily in the United States can opt out of the act. Again, this was intended to avoid the unfair result of persons paying the tax without possibly of receiving the benefit.

These new exceptions are in addition to the existing exceptions for self-employed persons, tribal employees, certain union members, and government workers.

The law is currently scheduled to go into effect on July 1, 2023. Effective that date, employees who have not opted out will have .58% of their wages withheld to pay the payroll tax.

There are also more changes under consideration in the legislature. Probably the most important one relates to the possibility that employees who opted out by purchasing their own long term care insurance re-certify that they continue to maintain that insurance on a regular basis. As written, the Act doesn’t require this.

That means employees who opted out could cancel their private insurance the day after opting out and never pay the Act’s payroll tax despite not maintaining their own insurance. The probability that thousands of Washington workers purchased long term care insurance with the intent of canceling their coverage immediately after opting out from the Act is suspected to have driven insurers’ reluctance to sell these policies in the months leading up to the opt out deadline; insurers lose money if they go through the expense of underwriting and selling coverage that will be canceled almost immediately.

But the legislature is considering changing this. One proposal would require employees to regularly re-certify that they maintain their private coverage to keep their opt out status and avoid paying the payroll tax. Importantly, a proposal requires employees who cancel their private coverage after opting out to not only pay the payroll tax in the future, but pay back taxes for the period after canceling their private coverage—with interest.

This proposal is just a recommendation, for now. But the legislature may be moving in that direction.

As a practical matter, this means that employees who purchased private coverage for purposes of opting out of the Act might want to maintain that coverage until the legislature works out whether and how it will require recertification of private coverage to maintain the opt out.

WA Long Term Care Tax Not Preempted By ERISA, Says Federal Court

We previously blogged about the questions whether the Washington State Long Term Care Act is preempted by ERISA. On April 25, 2022, the U.S. District Court for the Western District of Washington dismissed a lawsuit challenging the law on the basis of, among other things, ERISA preemption. The federal court held the law is not preempted by ERISA.

Most Washingtonians are by now familiar with the Washington State Long Term Care Act. The law deducts a percentage of employees’ wages to pay for future state long-term care benefits. The question at issue in the lawsuit was whether this arrangement violates ERISA, which generally prevents states from regulating employee benefit plans.

The court ruled that it does not. The ruling emphasizes that ERISA applies only to benefits “established or maintained” by employers. But the law “is a creation of the Washington Legislature, which, in this context, is neither an employer nor an employee organization as defined by ERISA” according to the court.

After finding ERISA did not apply, the court remanded the case to the Washington State courts to decide the plaintiffs’ other challenges to the law because, with ERISA off the table, there was no basis for the lawsuit to be in federal court.

Is Washington’s New Long Term Care Insurance Law Preempted by ERISA?

Washington State recently passed the Long Term Care Trust Act. The Act, approved by the legislature in 2019, sets up a state fund to pay for future long term care expenses like home nursing care, memory care, transportation, etc. The legislature passed the act to try to stave off a future crisis in which elderly or disabled folks in Washington won’t be able to afford these services. Currently, uninsured folks needing long term care typically fall back on state Medicaid benefits. There is concern that this will become unsustainable, particularly as more and more elderly folks need this care but can’t afford it.

The Long Term Care Act tries to cushion this blow by providing an employee-funded benefit to pay for future long term care. Starting January 1, 2022, employees in Washington State will pay a .58% payroll tax into the state long term care fund. Employers will be responsible for processing the tax and remitting the money to the fund.

This will probably lead to lawsuits challenging the Act as preempted by ERISA. ERISA generally prevents states from making their own laws regarding employee benefit plans. Whether this provision–known as “preemption”–applies to the Long Term Care Act will likely be whether the Act requires enough involvement by employers for courts to treat it as an employee benefit plan.

The Act’s critics say it obviously does. It can’t be disputed that long-term care insurance is an employee benefit that can be subject to ERISA if provided through an employee benefit plan. How, the critics say, could a law requiring employers to process payroll deductions for the purpose of providing benefits the employees only get because they’re working be anything but an employee benefit plan?

The answer might not be so simple. The U.S. Supreme Court has repeatedly held that ERISA does not preempt state laws requiring employers to provide benefits to their workers unless the law requires the employer to operate a so-called “administrative scheme.” For example, in the 1987 case Fort Halifax Packing Co. v. Coyne, the Supreme Court ruled that a Maine law mandating severance pay for workers fired during plant closures was not preempted by ERISA because it didn’t require the employer to do much more than write a check in an amount determined by the state. That decision explains that Congress’ purpose in stopping states from passing laws regulating employee benefit plans is to protect employers from burdensome state-law requirements that might discourage them from offering benefit plans to their employees. The Maine law didn’t do this because it didn’t require the employer to set up any kind of “administrative” scheme for the severance benefit but simply write a check when laying off workers: “To do little more than write a check hardly constitutes the operation of a benefit plan.”

If writing a check to your employee for an amount the state tells you isn’t an administrative scheme, it wouldn’t be hard for a court to rule that deducting money from their paychecks in an amount determined by the state isn’t one either.

It’s been a while since the U.S. Supreme Court has weighed in on a similar issue, so the Ninth Circuit Court of Appeals (the federal appellate court where any challenge to the Long Term Care Act is likely to wind up), will probably follow the Fort Halifax case. That’s what the Ninth Circuit did in deciding challenges to similar laws over the last few years.

For instance, in 2008, the Ninth Circuit found ERISA did not preempt a San Francisco ordinance requiring employers to pay for employee health care in Golden Gate Restaurant Association v. City and County of San Francisco. The court relied on the Fort Halifax case to determine the ordinance did not require employers to create an employee benefit plan. The court emphasized that an ERISA plan is not created by legislation that merely requires employers to pay money based on the number of hours worked by their employees.

More recently, earlier in 2021, the Ninth Circuit applied the same reasoning to hold a Seattle ordinance requiring employers to pay for employee health care was not preempted by ERISA in ERISA Industry Committee v. City of Seattle. The court relied on Fort Halifax as well as Golden Gate Restaurant Association. That decision was short, terse, and unpublished (meaning it lacks precedential value, an indication the court considered the issue largely settled by prior caselaw and not deserving of significant thought).

This suggests the courts will probably consider the Washington Long Term Care Trust Act along similar lines. Applying the Fort Halifax and Golden Gate Restaurant Association tests may make challenges to the Act difficult. After all, these cases arguably say Washington State could require employers to pay directly for employee benefits so long as the state is doing the math on the amount of the contributions. The main difference between these laws and the Act is that it’s the employees paying for the benefits provided by the Act rather than the employers. Since the employers just have to collect the money from their employees, it will be easy for a court to apply the Supreme Court’s reasoning from the Fort Halifax case that “To do little more than write a check hardly constitutes the operation of a benefit plan.”