Navigating self-employed health insurance options can be frustrating and at times enough for a sole proprietor to think about looking for a job that offers employer’s insurance and benefits. However, with the help of a Professional Employer Organization (PEO), a self-employed business owner can get maximum health coverage for less than expected. Treat yourself like the key man you are who deserves the best benefits package with health insurance available.
Affordable Care Act (ACA)
Of course, you have heard of it: The Affordable Care Act (ACA). The ACA is often referred to as Obamacare, since former President Obama championed the law that dictates most of the health insurance requirements today.
The goal of the tax law is to make health care available and affordable to all. It achieved this through requirements imposed on individuals to have health insurance and mandates most small business owners to offer health insurance to employees.
For business owners with 50 or more part-time or full-time employees, the ACA requires employers to offer health insurance or pay the Employer Shared Responsibility Payment (ESRP) per IRS regulations.
Smaller employers and self-employed individuals are not subject to this business mandate but must still fulfill their own personal requirements to maintain health insurance. While the costs of health insurance continue to rise, there are several ways for a sole proprietor to get the insurance he and his family need without overspending.
The Health Insurance Marketplace
The Health Insurance Marketplace is a resource, a network of participating insurance carriers operating in designated states where individuals, families and business owners can explore the health insurance options available to them. The Marketplace allows consumers to compare health insurance premiums and coverage and purchase the policies during open enrollment or after a qualifying life event.
While many people went to the Marketplace assuming this was the only place to get health insurance after the ACA was passed, some insurance companies refrained from joining the Marketplace to keep private insurance available and affordable to those who were not seeking the subsidies available through the Marketplace. Thus, shopping is always wise so that you can review all your options especially if you don’t qualify for tax subsidies.
Getting Hardship Exemption for Health Insurance
Even with the tax subsidies, there are those who were unable to afford healthcare coverage in some states because either there was no Marketplace available or there was another limiting factor. The Affordable Care Act allowed for hardship exemptions for those meeting specific criteria to avoid the IRS penalty when completing tax returns. This penalty has been rescinded as of the Tax Cuts and Jobs Act of 2017, going into effect in 2018.
This means that the IRS will no longer penalize individuals for not having a qualifying healthcare insurance policy in force for the entire year. As a result, the hardship exemption is now a moot issue for those who were concerned about it. With that said, just because the government is no longer penalizing a person for not having health insurance, there is still a need, particularly for a self-employed person to have active health insurance for him and his family.
In fact, medical issues and disabilities are often the biggest reason that independent contractors and self-employed individuals have to shut their businesses down. They are unable to maintain financial solvency with medical bills coming in. Combine the bills with slowed income resources because of the medical condition or injury prevents them from working.
Self-Employed Insurance Needs
The self-employed person is the ultimate bread-winner, often responsible for running the administrative components of the business, executing the deliverables and marketing. When it comes to being a key man in a company, the sole proprietor doesn’t get any more key. If anything happens to knock this person out of the day-to-day operations for any significant period of time, revenues can halt immediately. That doesn’t even factor in the costs of medical bills rolling in if the self-employed person is out due to illness or injury.
To make matters worse, many self-employed people are either under extreme stress managing everything on their own or putting themselves in harms that other ‘employees’ would be covered under workers’ compensation insurance. Take for example the handyman who falls off the ladder and is out for six weeks in a cast. Not only is he not making any money, if he doesn’t have the right insurance in place, but he is also paying for medical bills, rehabilitation services and prescription drug coverage.
How can someone who is self-employed keep the lights on while being out of commission?
There is no reason for a sole proprietor to not have health insurance. Even someone who is bootstrapping a startup can find something affordable through the Marketplace to provide at least a high-deductible health insurance plan that will take care of catastrophic or emergency care while mitigating cash outflow. Affordable health insurance is available if you look for it and mitigates financial risks from illness.
A high-deductible health plan helps keep premiums down while giving a finite cap on catastrophic coverage or emergency medical conditions. One trip to the emergency room can cost thousands of dollars.
Disability insurance is another very important insurance many self-employed and sole proprietors overlook because they feel they can’t afford it. Disability insurance pays a percentage of your income if you are unable to work due to disability. There are two types of disability policies: short-term disability and long-term disability.
Short-term disability pays a person while hurt and unable to work for up to six months. Long-term disability covers lost wages for any disability that extends beyond six months. Most disabilities last a median duration of 26 months, a timeframe that would easily bankrupt a sole proprietor unable to generate revenues during that period of time.
Life insurance is often a standard employee benefit offered by many employers. This is often a term policy for pennies on the dollar that covers anywhere from one to five times the employee’s annual salary for accidental death. It is an inexpensive way for many people to get high levels of coverage for a very reasonable price. Sole proprietors don’t usually have the opportunity to participate in these cost-effective group plans.
Benefits for the Self-Employed
A Professional Employer Organization (PEO) has given sole proprietors, independent contractors, and micro business owners the ability to have personal benefits without paying exorbitant administrative costs or premiums.
The PEO serves as a partner to the business, effectively leasing employees back to the business to perform the needed operations and administrative tasks. This set up allows the PEO to have large pools of employees increasing the group diversity, thus reducing the risk. All insurance is based on risk pricing, thus the wider the given pool of participants, the less the insurance often is per participant.
This model works extremely well for a self-employed person who would be in a group of one if he obtained insurance on his own. By combining with the PEOs group of employees, he is able to save on his individual benefits including health insurance.
Health Insurance for Self-Employed
There are different things to consider when choosing your health insurance. Think about how often you and your dependents go to the doctor, whether you are on regular prescriptions and have any chronic conditions that could create medical emergencies. Understanding your average annual medical costs and needs helps you to determine the right insurance plan to save money in the long-run.
Essentially, the cheapest plan doesn’t always save you money if you use health insurance regularly. Remember that health insurance and medical expenses paid as a self-employed business owner are a tax deduction against business income.
High Deductible Health Plans (HDHP)
A High-Deductible health insurance plan is considered by healthcare.gov as any plan with at least an individual deductible of $1,350 and a family deductible of $2,700. Total out of pocket costs for a high-deductible health insurance plan cannot exceed $6,650 for an individual and $13,300 for a family for in-network medical expenses. These are IRS defined standards to help consumers get a reasonably priced health insurance plan that covers the biggest potential expenses.
High-deductible health insurance plans are often considered by those who don’t go to the doctor often or anticipate having a great need to use the insurance. The plans with the highest deductibles are often considered “catastrophic plans” because they are there to set a financial safety net if someone has a serious accident or illness. Self-employed people can use health insurance premiums as a deduction on tax returns.
Health Savings Accounts
A Health Savings Account (HSA) is an IRS approved account a person can contribute to that helps them save for medical expenses. It functions very similarly to an Individual Retirement Account (IRA) that people use to save for retirement. You can contribute to an HSA and get a deduction for the amount from your tax return is Adjusted Gross Income (AGI). An HSA can be opened at any time; there is no requirement that it be opened during open enrollment.
As long as the money remains in the account, it can earn interest without generating a taxable event. When used to pay for medical expenses and prescriptions, it is withdrawn tax-free. The current maximum HSA contribution is $3,450 for an individual and $6,900 for a family. For those who rarely go to the doctor, saving on annual premium and contributing to the HAS puts a nest egg together for a future medical emergency.
Comprehensive Health Coverage
Comprehensive health coverage, also called Major Medical Coverage, is a health insurance policy that covers a wide range of medical services. This type of health insurance policy should cover everything from annual checkups to emergency room visits and prescriptions. Keep in mind that being a covered expense it in the plan doesn’t always mean the plan will pay the costs.
For example, assume you have a high-deductible health insurance plan with a $5,000 individual deductible. You hurt your knee playing tennis and are unsure if it is just a sprain or something more serious. The doctor runs several tests and orders an MRI with the bill coming out to $4,000. All of your services are covered under your policy subject to the deductible. This means you will pay $4,000 and still have $1,000 more to meet your deductible.
Keep in mind that health insurance policies vary widely and some might have this deductible but still offer some co-payment for emergency care or doctor’s visits. These types of plan structures often cost more on a monthly basis but reduce the sticker shock of dealing with an unanticipated injury or illness.
Essential Health Benefits
The Affordable Care Act set forth 10 standard requirements of all health insurance plans called Essential Health Benefits. This helps reduce confusion in the Marketplace over what are covered services and what is an additional service or excluded.
The 10 Essential Health Benefits are:
Ambulatory patient services
Pregnancy and newborn care
Mental health and substance abuse care
Rehabilitation services and devices
Preventative and wellness services
Pediatric services including oral and vision care
In addition to these Essential Health Benefits, plans must include coverage for birth control and breastfeeding options. All of these are the minimum coverage options for every plan in the Marketplace. Dental and vision coverage are usually extra and can be added on to major medical plans or purchased separately.
Preventative Health Services
Preventative health services must be offered by health insurance for free regardless of the deductible or copay costs. These are annual health screening for men, women and children that include bloodwork to test for high cholesterol, diabetes and a number of other conditions discovered or monitored through blood work. Wellness checkups including women’s mammograms and pap smears are included for free.
Children’s wellness exams and screening follow the age-appropriate schedule to monitor height and weight growth, developmental monitoring, oral health and vaccinations. Infants up to 12 months of age can also get free iron supplements if they are at risk for anemia.
A limited-benefit plan doesn’t have the same coverage that comprehensive health coverage has. It offers restricted benefits with caps on the amounts any particular service is covered for. This type of health plan may include vision, dental and hospital indemnity plans that pay a fixed about of money for specifically covered occurrences.
For example, a hospital indemnity policy might pay $100 if you go to the emergency room and another $75 if you have an x-ray during the visit. Rarely do limited-benefit plans cover the entire bill of services. This is why they are often used in conjunction with other medical services to offset any deductible costs or uncovered expenses.
A hospital indemnity plan can be considered a limited-benefit plan or even a supplemental policy. Companies like Aflac are known to offer supplemental health policies that provide cash during medical claims. These payments are designed to either help offset costs of uncovered medical expenses otherwise paid by comprehensive medical insurance, deductibles and out of pocket costs, or to offset time away from work or other costs associated with medical conditions.
Staying at a hospital may require the family to visit, pay to park and eat hospital food rather than cook at home. Supplemental policies often pay per day the person is unable to work or is in the hospital. Often the funds are not designated for any one thing and can be used at the discretion of recipients.
Making a Decision About Health Insurance
With so many choices for health insurance policies, making the right choice is often overwhelming. Even the lowest premium health insurance policies can seem expensive, so buying strictly on price is often not enough. Take the time to sit down and do the math. If you are working with a PEO, your benefits advisor will help walk you through the numbers so that you can choose the policy that makes the most sense.
The first thing to determine is whether you should work with a:
Each of these models has pros and cons you should consider.
The Health Maintenance Organization Model (HMO)
An HMO is structured to have one point of contact, a primary care physician be the main source of services and evaluation. You go to the primary care physician to have annual checkups and see them if you are sick or need a referral to another specialist.
The HMO model usually has lower premiums but does require you to jump through some hoops if you need to get to a specialist. This isn’t always convenient and can add up with each visit cost starting with the primary care physician and each referral out.
The Preferred Provider Organization Model (PPO)
The PPO allows you to pick providers as you need them. You have a primary care physician but can see specialists without having to gain access via the gatekeeper for referrals. A PPO often has a larger network of providers as well, offering a broader selection for families seeking certain types of doctors.
The PPO model is usually pricier in premium costs but because people feel more freedom to choose doctors and not having to go through gatekeepers, it is a very popular option for those who can afford a bit more in monthly premium.
The Exclusive Provider Organization Model (EPO)
The EPO is a modified version of the PPO that doesn’t require a primary care provider. It does not cover out-of-network care providers. The trade-off is lower monthly premiums. This is a good option for someone who doesn’t need a primary care provider and seldom goes to the doctor.
The Point of Service Plan Model (POS)
The POS is a hybrid of an HMO and a PPO, requiring a primary care physician to be the main point of service and contact. There are out-of-network providers but the patient is responsible for most of the paperwork. These plans are usually slightly more expensive than a traditional HMO but less expensive than a traditional PPO.
Getting Health Insurance Help and More
For the self-employed, health insurance and other benefits have always seemed like an expensive benefit to provide for themselves. With the help of a PEO, small businesses have access to every benefit that major employers have in an equal playing field.
Even if you don’t need a payroll provider or human resources assistance, access to health and disability insurance and retirement plans are well worth it. And, it is more than just access; the sole proprietor gets the benefit of PEO specialists help walk them through the process and planning of getting the right plan. Don’t wait for open enrollment to start shopping; a PEO can help you today.
We’ve given you a lot to think about here. But, we know you’d rather be growing your business. We’re here to help you define the best benefits plan for you and your business.