Health insurance options for the self-employed

Being self-employed comes with many benefits, like being your own boss and having control over your work schedule. However, one drawback is having to navigate the world of health insurance on your own. Luckily, there are several options available for self-employed individuals to obtain health coverage.

This article will go over the different health insurance options available for the self-employed to help you make the best decision for your health and budget.

Takeaways from this blog post:

• Medical debt in the U.S. is a significant issue, and having a health insurance plan can help protect you against unexpected financial burdens.
• Individual health insurance plans allow for customization of coverage based on your needs and budget, with the potential for federal premium tax credits to help cover costs.
• Health reimbursement arrangements (HRAs) and health savings accounts (HSAs) are additional options for some self-employed individuals to consider for cost-effective health coverage and tax advantages.

Why do you need health insurance coverage?

If you think you can go without health insurance coverage, think again. Even for those who are generally healthy, a sudden illness or injury can lead to major financial difficulties. KFF¹ reports that hospital costs for the uninsured are typically two to four times higher than what insured individuals pay for services. If you don't have enough money saved up for emergencies, you might end up in debt.

A significant number of Americans struggle with medical debt. According to KFF², medical debt in the United States totals at least $220 billion. Approximately 6% of adults, or 14 million people, owe at least $1,000 in medical debt, while 1% of adults, or around 3 million people, owe more than $10,000.

If you want to avoid these hefty medical bills, you need to plan ahead. Let's go over some health coverage options that can help protect your physical and financial well-being.

Individual health insurance plans

One option for self-employed individuals is to purchase an individual health plan. Individual plans allow you to choose the level of coverage that best fits your needs and budget. Based on your household income, you may also qualify for federal premium tax credits (PTCs) that can help cover your monthly premium costs.

These plans are available through the Health Insurance Marketplace, state-based exchanges, and directly from insurance companies. All federal or state-based marketplace plans comply with the Affordable Care Act (ACA), ensuring coverage for pre-existing conditions and the ten essential health benefits without benefit caps.

Wherever you decide to shop for your individual coverage, the cost will vary based on factors like the type of plan, coverage terms, your age, and ZIP code.

Health reimbursement arrangements (HRAs)

Health reimbursement arrangements (HRAs) are growing in popularity as cost-effective options for employer-sponsored health plans. Many business owners are forgoing traditional group health plans and offering HRAs to their employees instead.

An HRA is an employer-funded health benefit approved by the IRS. Employers can use it to reimburse employees tax-free for more than 200 qualifying healthcare costs. Reimbursements are tax-free for both employers and employees. Standalone HRAs, such as a qualified small employer HRA (QSEHRA) or individual coverage HRA (ICHRA), also allow employers to reimburse their employees for individual health insurance premiums.

Some examples of HRA-eligible expenses include:

• Doctor visits
• Preventive care
• Emergency services
• Prescription drugs
• Over-the-counter medication
• Mental health counseling

To participate in a QSEHRA, an employee must be a W-2 employee, not a contractor. They must also have a health plan with minimum essential coverage (MEC). ICHRA participation requirements are similar, except employees must have a qualifying individual health plan.

But can a self-employed person participate in an HRA? HRAs are only for W-2 employees only. However, the IRS recognizes C corporations as separate legal entities from their owners. Under this classification, the IRS considers C corp owners as common-law employees of the corporation. This means they can participate in the HRA along with their family members. Any reimbursements made by the corporation to the owner and their family members are tax-free as long as they MEC.

However, if you’re a 2% or more shareholder of a S corp, a partner, or a sole proprietor, you can’t participate in an HRA. As a partner or sole proprietor, you may be able to participate in an HRA through your spouse if they’re a W-2 employee of your business.

Health savings accounts (HSAs)

Health savings accounts (HSAs) are another great option for self-employed individuals. HSAs are tax-advantaged savings accounts that you can use to pay for future qualified medical expenses. HSA contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free. Any eligible individual can contribute to an HSA as long as they have an HSA-qualified high deductible health plan (HDHP).

Catastrophic health insurance plans

Catastrophic health insurance plans are a type of individual health insurance for people who are generally healthy and only need coverage for major medical expenses. These plans have lower monthly premiums but higher out-of-pocket costs. Catastrophic plans typically cover three primary care visits per year before you meet your deductible, making them a cost-effective option for self-employed individuals who don't need frequent medical care.

Spouse’s employer plan

This last option is for married couples. While it may sound obvious, if your spouse has employer-sponsored coverage, they can add you to their plan. However, this depends on the plan type your spouse has and the type of coverage it offers. You'll want to check the plan details and costs to see if it's a good fit for your healthcare needs.

Conclusion

When it comes to choosing health insurance as a self-employed individual, it's important to explore all your options and select a plan that meets your needs and budget. From HRAs to HSAs, there are several ways for you to afford necessary healthcare services. Additionally, consulting with a health insurance broker or financial advisor can help you navigate the complexities of health insurance and find the best coverage for your unique situation.

1. https://www.kff.org/report-section/the-uninsured-and-the-aca-a-primer-key-facts-about-health-insurance-and-the-uninsured-amidst-changes-to-the-affordable-care-act-what-are-the-financial-implications-of-lacking-insu/
2. https://www.kff.org/health-costs/issue-brief/the-burden-of-medical-debt-in-the-united-states/