Washington state has passed the nation's first public-operated, long-term care insurance program—the Long Term Care (LTC) Act—which is paid for by employees through employer withholding as a payroll tax. The statute is a compliance nightmare for employers, employees, and the state.
An added complication is whether the Employee Retirement Income Security Act of 1974, as amended (ERISA), preempts the ability of the state to regulate this area.
Tax Rate, Effective Date, and Benefit Amounts
The LTC Act imposes a mandatory payroll tax for all employees on all compensation—including stock-based compensation—without a cap, at a rate of .0058 of the employee's wages. While the payroll tax is effective as of January 1, 2022, no benefits are payable until 2025. The benefits payable are a maximum rate of $100 per day to a lifetime maximum of $36,500.
The payroll tax is deposited in a trust, which currently can only be invested in U.S. Treasury investments that will not yield the projected 5 percent rate of return needed to support the benefits. As a result, the payroll tax should be at a rate of .0066 rather than .0058, as the funding at the current rate yields a projected net present value funding deficit of $15 billion.
Window Period to Apply for Limited Individual Exemption
Under a substitute bill that is likely to pass this legislative session, there is a limited individual exemption for employees who have long-term care insurance as of July of 2021 and who apply for an exemption during a window period of October 1, 2021, through December 31, 2022.
Once that window closes, no further exemptions will be granted.
Is Long-Term Care an ERISA Benefit?
Yes. Under Section 3 of ERISA, benefit plans are covered by ERISA if they include medical benefits and benefits in the event of sickness, accident, or disability. RCW 48.83.020(5) defines long-term care insurance as a policy, practice or program that provides coverage for one or more necessary or medically necessary diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal care services, provided in a setting other than an acute care unit of a hospital.
Given the statutory definition and the requirement under all qualified long-term care insurance policies that the insured be unable to perform certain basic activities of daily living, there seems little doubt that an employer-sponsored plan to provide qualified long-term care insurance would fall into one or more of the above-referenced categories as the statute specifically provides for reimbursement of professional services, nursing home services, assisted living services, and memory care. Thus, workplace long-term care benefits will be employee welfare benefit plans subject to ERISA unless the benefits are provided in a way that does not constitute an employer-established plan (see below).
The fact that long-term care insurance is considered a benefit that is excepted from some ERISA requirements if it is offered separately does not change this result. Its excepted benefit status does affect whether an employer's long-term care insurance plan is subject to ERISA or whether it is considered a group health plan, which would affect whether the plan must comply with the enhanced claims procedures and certain other changes made by health care reform.
For example, excepted benefits, including long-term care insurance benefits that are offered separately, should not be subject to the internal claims and appeals and external review requirements added by health care reform to the Public Health Services Act (PHSA) and incorporated by reference into ERISA Section 715. In one of the few litigated cases in this area, the court concluded that a long-term care insurance arrangement was subject to ERISA.1
Is Long-Term Care an Employer-Established Plan?
Yes. In its amicus brief concerning California state-mandated IRAs, the U.S. Department of Labor indicated that state-mandated IRAs were maintained by the employer. Although the Biden Administration is no longer actively supporting ERISA preemption of state-mandated IRAs (it is remaining neutral), the positon taken by its previously submitted amicus brief is legally sound.
ERISA-covered plans must be "established or maintained" by an employer.2 An employer maintains a plan if it cares for a plan under an ongoing administrative scheme.3 "Maintain" does not rise to the level of "administer."4 Nor does the term "require an organization to have authority over the adoption, modification, termination, benefit commitments, or terms of a plan."5
The LTC Act undisputedly establishes an ongoing administrative program. The statute defines the employer's administrative responsibilities within that program. The statute requires that employers continually update their payroll deductions to reflect changes to their workforce of eligible employees, the contribution rate for each employee, and whether the employee is exempt from the LTC Act.
Where a plan requires an employer to make eligibility and benefits decisions on an individual case basis, the plan will satisfy the ongoing administrative scheme requirement sufficient to maintain the plan.6 The fact that employers do not voluntarily create these ERISA plans does not alter the conclusion that they are still "employers" as defined by ERISA who "maintain" the plan.7 In other words, the existence of the state mandate under the LTC Act does not mean that employers cannot "maintain" the withholding arrangements for ERISA coverage purposes.
Is Long-Term Care Exempt as a Payroll Practice?
No. The LTC Act cannot be exempt as a payroll practice because the ERISA exemption requires employee participation to be voluntary and coverage under the LTC Act is mandatory, with the exception of a very limited one-time individual exemption. A safe harbor regulation, 29 C.F.R. § 2510.3-2(a), provides that ERISA does not cover a payroll deduction arrangement so long as all of the following conditions are met:
- (1) The employer makes no contributions;
- (2) Employee participation is completely voluntary;
- (3) The employer does not endorse the program and acts as a mere facilitator of a relationship between the IRA vendor and employees; and
- (4) The employer receives no consideration except for its own expenses.
A failure of any condition establishes that the plan is an employee pension benefit plan for purposes of ERISA, assuming the plan was otherwise covered.8 Because the LTC Act provisions are mandatory and not voluntary, long-term care cannot satisfy the safe harbor requirements. Thus, long-term care is an ERISA-covered plan.
Is Long-Term Care Saved as a Law Regulating Insurance?
No. Congress contemplated the types of benefit plans that states could require employers to have and chose to only exclude state laws mandating plans providing three types of benefits from ERISA preemption. ERISA section 4(b)(3), 29 U.S.C. § 1103(b)(3), excludes state-required workers' compensation, unemployment compensation, or disability insurance plans from ERISA coverage, and, thus, those laws are not preempted by ERISA.
Because of this, states are permitted to require separate non-ERISA plans covering only those kinds of benefits. Similarly, Congress amended ERISA section 514(b), 29 U.S.C. § 1144(b), to specifically save the Hawaii Prepaid Health Care Act from preemption after it was found to be preempted in Standard Oil Co. v. Agsalud.9 Similar Congressional action would be required to save the LTC Act.
Nor is the LTC Act directed at the insurance industry to be saved as a law that regulates insurance. To be saved as a law that "regulates insurance" under § 1144(b)(2)(A), the law must satisfy two requirements. First, the state law must be specifically directed toward entities engaged in insurance. Second, the state law must substantially affect the risk pooling arrangement between the insurer and the insured.10
The Washington law is not directed at the insurance industry and therefore is not saved from preemption as a law that regulates insurance.
The LTC Act mandates a benefit that is arguably preempted by ERISA. As such, employers that desire to challenge the LTC Act should consider filing a declaratory action in federal court to challenge the statute on the grounds of ERISA preemption.
As the tax is not effective until January 1, 2022, there is still time for a court to render a decision before the effective date of the LTC Act, if employers act quickly.