UPDATED 10/1/13: Though this article remains true, you may now go to Healthcare.gov to learn more.
The US Supreme Court concluded in a 5-4 decision on June 28th 2012 that the so-called “individual mandate” to purchase health insurance, also known as the “shared responsibility payment,” is neither a penalty (despite being labeled as such in the original legislation) nor a legal command, but rather a tax on the choice to forgo buying insurance. The IRS now has the authority to assess and collect the tax. (Meaning: tax preparers like me will have to ask about your health insurance.)
This post briefly addresses the impact of the SCOTUS’s decision on self-employed sole proprietors with no employees and who aren’t themselves employees elsewhere. Freelancers, graphic designers, photographers, carpenters, bookkeepers and accountants, massage therapists, personal trainers, single-member LLCs, unincorporated one (wo)man shops — this article is about what the Affordable Care Act (ACA) means for you.
What’s already happened in health care before the SCOTUS decision
Several elements of the ACA are already in effect (as of September 23rd 2010) and the Court’s decision just allows them to continue. Those elements include:
- No lifetime or annual coverage limits.
- Mandated coverage for preventive health services without any cost-sharing requirements (deductibles, co-pays, or co-insurance).
- Prohibition on exclusion from coverage due to pre-existing conditions.
- A requirement that dependents be allowed to stay on their parents’ health coverage until they turn 26 years old.
But in terms of when the “tax” kicks in, most individuals will be required to obtain Minimum Essential Coverage for themselves and their dependents beginning in 2014.
Two big things for self-employed people
1) THE PREMIUM ASSISTANCE CREDIT
States will be required, beginning in 2014, to create insurance pooling mechanisms known as “exchanges.” Many states (including my state of North Carolina) have already created these exchanges. Premium assistance credits will be available to people who purchase health insurance through an exchange, who are not eligible for other affordable coverage elsewhere, and whose household income is between 133 percent ($11,490 for individuals in 2013) and 400 percent ($45,960 for individuals in 2013) of the federal poverty level.
If your small business is new and not just yet a gold-spinning machine, the premium assistance credit could benefit you. Here’s a great calculator to see if you’re eligible.
2) THE “PERSONAL RESPONSIBILITY REQUIREMENT”
Health care coverage will be required, and we self-employed types will be “personally responsible” for having it. If we choose not to obtain health insurance either through an exchange or in the private marketplace, the penalty-deemed-a-tax will be:
- $95 or 1 percent of taxable income in 2014;
- $325 or 2 percent of taxable income in 2015;
- $695 or 2.5 percent of taxable income in 2016; and
- Adjusted according to income every year after.
The penalty applies to any period the individual does not maintain Minimum Essential Coverage and is determined monthly. Note that if you’re in jail or out of the country, you are exempt from the requirement to obtain health insurance.
THE BOTTOM LINE — and what I personally do
Many self-employed people — especially the young and healthy ones — may opt to just pay the tax rather than buy health insurance because it seems the cheaper option.
I think this is a terrible idea.
If you’re relatively healthy, an infrequent user of medical services, and view (as I do) health insurance not as a reason to visit the doctor for every runny nose but instead as insurance against a financially catastrophic medical issue, then consider doing what I do:
Purchase a relatively inexpensive high-deductible health insurance plan with a low monthly premium and access to a tax-deductible Health Savings Account (HSA).
For example, if you live in NC like me, visit the BCBSNC website to learn more about their “Blue Options HSA” plan.
I realize this option doesn’t work for everybody for various reasons. But let’s say you’re unfortunately diagnosed with cancer. In my opinion it’s far wiser to pay a $5,000 deductible plus $125/month in premiums for cancer treatment versus hundreds of thousands of dollars because you failed to acquire health insurance. (I suppose that you could also rely upon the kindness of strangers to pay for your medical treatments, like an IndieGogo fund I saw recently. I’m all for helping out a neighbor, but this seems an unwise strategy upon which to base one’s financial security and health care.)
And as always, the cost of your health insurance premium payments may be tax deductible if you’re self-employed and your business had a net profit for the year. See here for more info, or just ask your tax adviser. (If you don’t have a tax adviser, I’m for hire.)
(Photo by a.drian)