Employer LTC Benefit vs State Payroll Tax - The Cost and Retention Comparison

The Real Cost Question: Payroll Tax vs. Private LTC Coverage

Every employer with Washington-based employees already knows the math hurts. The WA Cares payroll tax costs 0.58% of every employee's wages, with no cap. But the harder question is whether paying that tax is actually cheaper than funding a private group LTC benefit that gives employees real coverage and gives your organization a recruiting edge.

This is not a compliance-only decision. It is a financial and talent strategy decision. And the numbers tell a clear story once you lay them side by side.

If you are still getting up to speed on how state LTC payroll taxes work, the long-term care insurance employer hub covers the full landscape, including which states have active or pending mandates.

How the State Payroll Tax Actually Works

Washington's WA Cares Fund collects 0.58% of gross wages from every W-2 employee who has not secured an approved private LTC policy and opted out during an authorized window. The tax applies to all wages with no ceiling, which means your highest-paid employees generate the largest contributions.

Here is what the state program delivers in return: a lifetime maximum benefit of $36,500 (adjusted modestly for inflation), payable only to individuals who have paid into the system for a minimum vesting period and who need assistance with at least three activities of daily living. Benefits are available only in Washington. Employees who move out of state or who joined the workforce recently may never qualify.

For employers, the tax shows up as an ongoing payroll line item with no expiration and no opt-out once the window closes. If you missed the WA Cares opt-out window, your employees are locked in unless they leave the state workforce.

Other states are studying or advancing similar mandates. The trend is accelerating, and the cost exposure compounds for multi-state employers managing LTC payroll tax obligations across jurisdictions.

What a Private Group LTC Benefit Actually Costs

Private group LTC insurance premiums depend on plan design, employee demographics, and whether you choose a traditional pay-as-you-go structure or a limited-pay option like a 10-pay plan. But ballpark numbers are useful for comparison.

For a 500-employee organization with an average age in the mid-30s to low-40s range, group LTC premiums through a voluntary or employer-sponsored plan typically fall between $40 and $120 per employee per month, depending on benefit levels and plan structure. A 10-pay plan concentrates premiums into a shorter window but eliminates the cost entirely after the payment period ends.

Compare that to the payroll tax. For a 500-employee company with an average salary of $85,000, the WA Cares tax costs roughly $493 per employee per year, or about $41 per month. That sounds similar to the low end of private coverage, but there are critical differences:

• The payroll tax never stops. It continues for the entire duration of employment.
• The payroll tax scales with wages. Raises, bonuses, and promotions all increase the cost.
• The payroll tax delivers a capped, state-only benefit that many employees will never use.

A detailed breakdown of how much LTC payroll tax costs employers at different organization sizes shows how quickly the numbers diverge from private coverage costs, especially for companies with above-average compensation.

Cost Modeling: 500-Employee Organization Over 10 Years

The table below compares three scenarios for a 500-employee company with an average salary of $85,000 per year, assuming 3% annual wage growth.

Scenario 1: WA Cares Payroll Tax Only

• Year 1 cost: ~$246,500
• Year 5 cumulative cost: ~$1,310,000
• Year 10 cumulative cost: ~$2,820,000
• Benefit to employees: $36,500 lifetime max, WA-only, three-ADL trigger

Scenario 2: Voluntary Group LTC (Employer-Facilitated, Employee-Paid)

• Year 1 cost to employer: Administrative only (minimal)
• Year 5 cumulative employer cost: Under $50,000 (admin and communication)
• Year 10 cumulative employer cost: Under $100,000
• Benefit to employees: $150,000+ in portable LTC coverage, nationwide

Scenario 3: Employer-Contributed Group LTC (10-Pay Plan)

• Year 1 cost: ~$360,000 ($60/employee/month)
• Year 5 cumulative cost: ~$1,800,000
• Year 10 cumulative cost: ~$3,600,000 (but payments end at year 10; coverage continues)
• Benefit to employees: $150,000+ in portable, permanent LTC coverage

The employer-contributed 10-pay plan costs more upfront but has a hard stop. After year 10, coverage is fully paid and the ongoing cost drops to zero. The payroll tax, by contrast, keeps climbing every year as wages increase.

For organizations that choose the voluntary model, the employer enables access to group-rated coverage at near-zero direct cost while still giving employees a meaningful benefit and a payroll tax exemption.

The Retention and Recruitment Advantage

Cost comparisons only capture part of the picture. The strategic value of a private LTC benefit shows up in retention data and recruiting conversations.

Employees who receive LTC coverage through work report higher satisfaction with their benefits package, particularly employees in their 40s and 50s who are beginning to think about caregiving risks. For mid-career professionals weighing two similar offers, a differentiated benefit like group LTC insurance can be the tiebreaker.

There is also a retention dynamic specific to the payroll tax. Employees subject to the WA Cares tax often feel it as a pay cut with no tangible upside, especially younger workers who may not vest before changing jobs or leaving the state. When an employer instead enables access to portable private coverage, that friction converts into perceived value.

Organizations that have moved proactively on LTC benefits report using them in offer letters, benefits summits, and total compensation statements. The benefit signals long-term thinking, financial literacy, and genuine care for employee wellbeing, all of which reinforce employer brand.

Tax Efficiency for Employers and Employees

Private group LTC insurance premiums may be tax-deductible for the employer as a business expense, depending on plan structure and how contributions are handled. Employer-paid premiums for qualified LTC policies are generally deductible under Section 162 and are not included in employee taxable income.

For employees who pay their own premiums through a voluntary plan, the premiums may be deductible as a medical expense if they exceed the AGI threshold, and age-based deduction limits apply. The current tax deduction limits for LTC insurance outline what is deductible by age bracket.

The payroll tax, on the other hand, offers no deduction for the employee and no offsetting tax benefit for the employer. It is a pure cost with no tax planning flexibility.

When the Payroll Tax Is Unavoidable (and When It Is Not)

Not every employee can opt out. In Washington, the exemption window has opened and closed, and employees who did not secure qualifying coverage during the window are now locked into the tax. Future opt-out windows may open, but timing is uncertain.

For employers evaluating strategy now, the key question is whether to layer a private benefit on top of the tax (for employees who cannot opt out) or to prepare for upcoming state mandates by establishing a qualifying plan before the next window opens. States like California and New York are advancing their own LTC programs, and early movers who already have group coverage in place will be positioned to offer exemptions when those programs launch.

The overview of why states are passing LTC payroll taxes explains the policy drivers behind the trend and which states are furthest along.

Building Your LTC Strategy Before the Next Mandate Hits

The comparison between payroll tax and private coverage is not theoretical. It is a budget line item, a retention lever, and a compliance question that grows more urgent as additional states move toward mandates.

Organizations that evaluate both paths now, rather than defaulting to the tax, give themselves options: lower long-term costs, better employee outcomes, and a benefit that actually differentiates.

To see how these numbers apply to your specific workforce and state exposure, run the numbers for your organization or request a personalized multi-state LTC exposure briefing from Hollowtree.