Health Insurance for The Self Employed

This post originally appeared on Forbes.

 

HealthCare.gov Stock imagery
HealthCare.gov Stock imagery

 

With the deadline for enrolling in a 2016 insurance plan through the Health Insurance Marketplace looming, I’ve heard from many of my self-employed clients and friends that are facing huge rate increases this year. A study by the Henry J Kaiser Family Foundation Many noted that 48% of uninsured adults cite cost as the main reason they are still uninsured. Some self-employed people are choosing to go without health insurance because the penalty going without coverage is still less than annual premiums.

Foregoing health insurance coverage is not a decision I endorse. For 2016, the penalty for not having health insurance is the higher of 2.5% of your household income (with a maximum of the total yearly premium for the national average price of a Bronze plan sold through the Marketplace) or $695 per adult plus $347.50 per child under 18 (with a maximum of $2,085 per year). For 2017 and beyond, the percentage option will remain at 2.5%, but the flat fee will be adjusted for inflation. There are certain exemptions that may help you avoid the penalty.

According to the same Kaiser study, nearly 36% of low- and middle-income uninsured adults said they had problems paying medical bills. At some point, almost everyone is going to need some sort of medical care and medical bills are the single largest cause of consumer bankruptcy. If you are under 30 years old OR are granted a hardship exemption, you can purchase a catastrophic health plan through the Marketplace, no matter your income level. A catastrophic health plan doesn’t cover any benefits other than three primary care visits per year before the plan’s deductible is met. The monthly premium is lower than standard plans, but the out-of-pocket costs for deductibles, copayments, and coinsurance is higher. These types of plans can protect you in the event of some major medical calamity.

Self-employed people have an advantage over employed people who are not covered by an employer group plan. Employees who aren’t covered by their employer’s group plan and have to purchase their own insurance may be able to receive an itemized deduction on Schedule A if their total out-of-pocket medical premiums exceed 10% of their Adjusted Gross Income (AGI) and they have enough other itemized deductions to exceed the standard deduction. Few people are able to meet both of those hurdles.

Self-employed people, however, may be able to deduct health insurance premiums on Line 29 of Form 1040, an “above-the-line” deduction. In order to get an above-the-line deduction, you must report a profit from your business on Schedule C (or have self-employment income from a passthrough entity or farm). If you have some self-employment income, but not enough to cover your health insurance premiums, you can deduct enough premiums to bring your income on Sch C to zero, then report the remainder as an itemized deduction on Schedule A, where you may or may not get a benefit.

If you are married and have the option of getting coverage under your spouse’s employer subsidized health plan, you won’t be able to take your health insurance premiums as an above-the-line deduction. You’ll only be able to claim them on Schedule A.

Some people are still not convinced. Why pay several hundred dollars per year for health insurance coverage with such large deductibles that they wind up paying all of their medical bills out-of-pocket anyway? Because you may be able to save on your taxes AND stash away more money for retirement if you purchase a health insurance plan that is eligible for a Health Savings Account (HSA). An HSA allows you to set aside set aside money to pay for current health care expenses and save for those in the future. For 2016, you can contribute $3,350 per year to an HSA for an individual or $6,750 for a family. If you’re over age 55, you can contribute an extra $1,000 per year. HSA contributions are another above-the-line deduction, reported on Line 25 of Form 1040. Interest earned on the account is tax-free and you can make tax-free withdrawals for qualified medical expenses.

Many people confuse HSAs with health care flexible spending accounts (FSAs), which have use-it-or-lose-it rules. HSAs have no limits on carryovers or when the funds may be used. If you need to use your HSA funds to reimburse yourself for out-of-pocket medical expenses, you can do so. If you don’t need the money, you can leave it there and it can act as another vehicle for retirement savings.

Think of your HSA like a Roth IRA, but better. You can enjoy the benefits of tax-free growth, but you also get the benefit of a current tax deduction. Chances are your medical expenses are going to be higher in retirement than they are right now. Even if you are enrolled in Medicare after age 65, there are still out-of-pocket medical expenses as well as premiums for Medicare Part B.

Before age 65, you’ll face a 20% penalty for withdrawal of HSA funds for nonqualified medical expenses. Starting at age 65, you can make penalty-free distributions for any reason, though you’ll still pay tax on the account’s earnings for any withdrawals that aren’t for qualified medical expenses.

It’s worth noting that the Marketplace is not the only option for shopping for health insurance. You’ll have to use the Marketplace if you want to qualify for premium tax credits, but if your income is too high to qualify for subsidies, you may be able to shop around online or with the help of a broker.

The deadline to enroll in a 2016 insurance plan through the Marketplace is January 31, 2016 for coverage to take effect March 1, 2016.

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