Large companies have
the ability to negotiate favorable contracts with major health insurance
companies. These contracts often offer lower premiums, lower deductibles, and
better network access for the employees of those companies. Large companies may
also have Human Resources departments with staffed Benefit Coordinators who can
help you with questions you have about insurance or assist you when you are
communicating with the insurance company. When you leave a company to start
your career as an independent contractor, you are going to miss out on these
benefits. On this page, I'm going to outline the major problems I've run into
with individual insurance, but I'll also share with you a couple of really
important financial benefits that I've learned as well.
First, the bad.
After leaving full time employment to become an independent contractor 10 years
ago, here are some of the problems I've faced with individual health insurance:
- Plans change from year to year, so my family has to re-evaluate our needs on an annual basis. Each year, new plans come onto the market, and some plans are eliminated. The benefit tiers change, as do the networks that a plan covers.
- We spend a lot of time each fall reviewing the next year's plans to figure out which will be accepted by our preferred hospitals and doctors.
- Our deductible is so high that insurance rarely covers anything.
- At a couple of points, our monthly premium payments were higher than our monthly mortgage payments.
- Dealing directly with insurance companies is a real nightmare. Based on my experience, they have little interest in helping individuals.
With all of these
problems, it's no wonder I often hear people say "I'd love to try
contracting, but I'd hate to lose out on my employer's great health insurance
benefits." Yeah, I hear you.
Before I get to the
good stuff, let me put in a quick plug for COBRA (see my post). COBRA allows
you to buy into your former employer's health insurance plan for 18-36 months,
and I found it to be a great way to ease my transition into contracting. I signed
up for Cobra upon leaving my job, focused on the other more pressing aspects of
launching my contracting career, and then figured out a replacement for COBRA
the next year.
Okay, now on to the
good stuff. Once you've decided to bite the bullet and shell out for individual
health insurance, there are a couple of opportunities to cut down on your
overall costs. Those are the Self Employed Health Insurance Deduction and
Health Savings Accounts.
Self Employed Health
Insurance Deduction
Sure, your monthly
premiums are likely going to be high, but as a self-employed individual, you
are eligible to deduct those premiums. Factoring in the deduction, the amount
you actually pay is going to drop by 20-30%, depending on your marginal tax
rate.
Take a look at the
following IRS resources for more information:
IRS 1040
Instructions, page 85, Schedule 1 Line 16. This provides you with a general
overview of who is eligible to take this deduction. For example, you AND your
business can't be deducting these premiums, and you aren't eligible if you have
the opportunity to be covered by your spouse's employer based coverage.
IRS 1040 Schedule 1,
Line 16. This is where you will enter the amount of premiums paid.
Health Savings
Accounts (HSAs)
Health Savings
Accounts are hands down my favorite way to save. They are the only "Triple
Tax Advantaged" savings vehicle that I know of. By that, I mean you will
have the following tax benefits:
- The money you put into an HSA is tax deductible
- The money in your HSA grows tax free
- If you use the money for health related expenses, you don't pay taxes when you withdraw it
Most people that I
mention this to say something like "Sure, I have an FSA at work. I hate
putting money into it, because if I don't use it by the end of the year, I lose
it." Let me make this clear: An HSA
(Health Savings Account) is not an FSA
(Flexible Spending Account). It is soooo
much better. With an HSA you have the option
to withdraw money to cover healthcare expenses in the short run, but you can
also leave money in your account and let it grow. And grow. And grow. My wife
and I are using our HSA as part of a retirement savings strategy, with the goal
of being able to cover all of our healthcare related costs in retirement with
this triple tax-free money.
Details:
- In order to qualify to make tax free contributions to an HSA, you have to be enrolled in a "High Deductible Health Plan." See this IRS publication for clarification: https://www.irs.gov/publications/p969. Basically, your deductible has to be higher than $1,350 for an individual or $2,700 for a family and your out-of-pocket maximum has to be less than $6,750 and $13,500, respectively (2019 numbers).
- There is a limit on how much you can contribute annually: $3,500 for an individual and $7,000 for a family. These totals assume that you were enrolled in a qualifying plan for the entire year - if you are only enrolled for part of the year, these totals get prorated.
- Different HSA providers offer different investment options. I use OptumBank, and they allow you to invest all money over $2,000 into a defined list of mutual funds.
- Lastly, don't forget the deduction! You will calculate your deduction on IRS form 8889 https://www.irs.gov/pub/irs-pdf/f8889.pdf, and you will report it on IRS form 1040 Schedule 1, Line 12 https://www.irs.gov/pub/irs-pdf/f1040s1.pdf
That's it! I hope
this page helps make your transition away from employer based health insurance
a little more streamlined.
Happy Contracting!