Health Insurance for the Self-Employed – Protecting Your Business’s Greatest Asset

“I’ve been considering quitting my full-time job and getting a 
part-time job that would pay the bills [so I can start a home 
business] … The one biggie my full-time job provides me now 
is health insurance. If I was to get a part-time job, I’d probably 
have to pay for my own health insurance and I know that can 
be expensive.” 

Like Jason, who sent me the above email this week, many a 
dissatisfied employee would chuck in their full-time J.O.B. 
(just over broke) for their part-time home-based business in 
a heartbeat if not for one thing. Employer-provided health 
benefits. It’s a biggie, no doubt about it. 

Undeniably, employer-paid or -subsidized health benefits 
are one of the few real perks of working for someone else. 
In fact, surveys have shown that, for employees (especially 
those with families), paid benefits are hands down the most 
important element of their compensation packages. 

And there’s no shortage of people already running their 
own home businesses with no health or disability coverage 
at all. Scary. After all, if you’re dependent upon your 
home business as your sole source of income and you 
lose your health, you lose your livelihood as well. 

Bottom line? If you run a home-based business you can’t 
afford not to have health coverage of one form or another. 
Here’s how to make it happen, whatever your 
circumstances. 

BASIC OPTIONS FOR THE EMPLOYER OF ONE (YOU) 

You have three basic options when it comes to health and 
disability insurance. 

= Spouse Coverage 

If your spouse has health coverage from his or her employer, 
as a general rule, use that. It probably provides better and 
less expensive coverage than you could get on your own. 

= Group Health Insurance 

The main advantage of group health insurance plans is that 
they can’t turn you away because of health problems. The 
good news for the solo entrepreneur is that an increasing 
number of companies are offering group health plans for 
“groups” of one. This varies by state though so you’ll need 
to do your homework to find one. 

= Individual Health Insurance 

These plans are fine if you don’t have any pre-existing 
medical conditions. (If you do, try your best to find a group 
plan that will cover a group of one.) They’re subject to 
medical underwriting so your state of health will be a factor 
the insurance company takes into account in determining 
whether to accept your application. 

Of course, the mere fact that you’re able to get into a good 
plan is one thing. Doing so affordably is quite another. 

REDUCING THE HIGH COST OF HEALTH INSURANCE 

There are several ways of minimizing the cost of health 
insurance. Your tolerance for risk will determine which, 
if any, you are comfortable with. 

= Reduce the Level of Coverage 

Do you really need to have every doctor’s visit and 
prescription covered? If you only go to the doctor once 
a year for an annual examination, have no health 
conditions, don’t need regular expensive prescription 
medications and are generally healthy, consider cutting out 
coverage for office visits and prescriptions. 

= Higher Deductible 

Similarly, if you’re reasonably healthy, don’t visit the doctor 
very often and don’t need to use expensive medications, 
consider switching to a higher deductible to save on 
premium costs. By increasing your deductible from $100 
to $2,000, you can cut your premium payment in half. 

= Annual Premium Payments 

If you can afford to do so, pay your premiums annually 
rather than monthly or quarterly to avoid service fees and 
to take advantage of prepayment discounts where 
available. 

= Join Associations 

Just because you’re going it alone in your business 
doesn’t mean you can’t take advantage of the group 
buying power that being a member of an association 
offers. Check out your local chamber of commerce, 
various trade and professional groups and small and 
home business associations for member benefits. Many 
offer access to discounted health insurance. 

Here are a few small/home business association links 
to get you started (you’ll need to cut and paste some 
of these links if they wrap to the next line): 

National Association for the Self-Employed 
http://www.nase.org/nase_benefits/health_benefits.asp 
American Association of Home-Based Businesses 
http://www.aahbb.org/benefits.htm 
Home Office Association of America 
http://www.hoaa.com/allbenefitsnew.htm 
National Business Association 
http://www.nationalbusiness.org/NBAWEB/Directory/Internal_Pages/Member_Benefits/Health.htm 

Don’t forget to check out local associations in your area 
or associations relevant to your particular profession. 

= Shop Online 

Being able to offer insurance products online means insurance 
companies save on broker and agent fees. Often, this 
translates into premium savings for policies purchased over 
the Internet. So, when your fingers do the walking, make 
sure they do so on a keyboard and not the Yellow Pages. 

= Medical Savings Accounts 

Under the Health Insurance Portability and Accountability 
Act (HIPAA), if you’re self-employed you may be eligible to 
use a medical savings account, or MSA. 

MSAs work in conjunction with higher deductible health 
insurance policies to reduce premiums and allow you to use 
pre-tax dollars to pay for your medical expenses up to the 
limit of the deductible on your insurance policy. 

Basically, you reduce your premium by replacing a low- 
deductible policy with high-deductible policy and use the 
premium saving to make fully tax-deductible contributions 
to your MSA. You can contribute up to 65% of the deductible 
each year into your MSA (75% for families). The money goes 
into a tax-deferred account or trust and you pay your medical 
expenses (until you reach the deductible) by drawing from the 
account. Once you hit the deductible, of course, the 
insurance policy kicks in. 

If you spend less than you contributed, the surplus stays 
in the account and earns interest. Not only that, the funds 
can be invested in high-return vehicles such as mutual funds 
and stocks. 

As the balance can be carried forward, an MSA can be used to 
accumulate a pretty healthy nest egg for retirement. In fact, 
a Journal of Financial Planning analysis calculated that if you 
contribute $1,500 per year into an MSA for 25 years, assuming 
a 12% rate of return, you’ll end up with almost $1.5 million. 
That’s assuming you don’t draw from it to pay for medical 
costs, of course. 

There are some limitations though. First, the range of 
deductibles is limited to $1,500 – $2,250 for individuals and 
$3,000 – $4,500 for a family. Second, as we saw above, you 
can contribute only 65% of the deductible as an individual or 
75% for a family. 

So, if you’re an individual and you choose a policy with a 
$2,000 deductible, you’ll be able to contribute 1,300 pre-tax 
dollars into an MSA each year. In other words, Uncle Sam 
pays for part of your health insurance/retirement fund. How 
fitting. 

The money in the MSA can be used to pay any medical 
expenses incurred before the deductible is reached, as well 
as other eligible costs such as contact lenses and dental 
work. If you use the money for anything else, you must not 
only pay tax on the amount withdrawn, but a 15% penalty 
on the top. (If you’re over 65 when you make the 
withdrawal the penalty is not applied but you’ll still have to 
pay the tax.) 

(By the way, MSAs are also available to you if you work for 
a business with fewer than 50 employees.) 

In short then, MSAs offer a very tax-effective and potentially 
lucrative way to self-fund part of your health care costs while 
dramatically reducing your premiums. If luck is on your side 
and you remain healthy, by the time you reach retirement 
age, your MSA could well fund your retirement. 

Pretty neat. 

= Self-Employed Health Insurance Deduction 

Finally, the self-employed can write off 70% of their health 
insurance premiums in 2002. This increases to 100% in 2003. 
That’s only so long as the total doesn’t exceed the net profit 
from your Schedule C minus deductions for one half of the self- 
employment tax and Keogh, SEP and Simple contributions 
though. 

Also, the deduction can only be claimed for months when 
you weren’t eligible to participate in a subsidized health plan 
from another employer (including your spouse’s employer). 

Self-employed workers who qualify for both the self-employed 
health deduction and the itemized medical deduction can 
write off the other 30% this year on Schedule A. (Medical 
expenses are deductible on Schedule A only to the extent 
they exceed 7.5% of adjusted gross income.) 

WHAT TO DO IF YOU’RE UNINSURABLE 

The foregoing is all well and good if you’re able to get health 
insurance in the first place. But what if you have a pre- 
existing condition that disqualifies you from an individual 
health plan and you can’t get into a group plan? In other 
words, you can’t get insurance at any price. 

= HIPAA 

Although beyond the scope of this article, the Health 
Insurance Portability and Accountability Act (HIPAA) may 
offer you some protections. For more information about how 
HIPAA may help you obtain health insurance even if you 
have a pre-existing condition, visit 
http://www.hcfa.gov/medicaid/hipaa/content/hipsteps.asp . 

= Risk Pools 

High-risk health insurance plans, also known as risk pools, 
are state-funded plans and are an important safety net for 
individuals who are denied health insurance because of a 
medical condition. They’re available only in 29 states though. 

To be eligible, you must be a resident of the state from 
which you seek coverage (unless there’s reciprocity 
between that state and the state you reside in) and 
you must be able to prove at least one of the following: 

1. that you’ve been rejected for similar health insurance 
coverage by at least one insurer; or 

2. you’re presently insured with a higher premium; or 

3. you’re presently insured with a rider or rated policy. 

You will not be eligible for participation in a risk pool if: 

1. you’re not a resident of the state from which you seek 
coverage (again subject to reciprocity between states); 
or 

2. you’re eligible for Medicare or Medicaid; or 

3. you’ve terminated previous coverage in the plan 
unless at least 132 months have since elapsed; or 

4. you’re an inmate of a public institution. 

For more information on risk pools in your state, contact 
your state health insurance department, the national 
association “Communicating for Agriculture and the Self- 
Employed” (1-800-432-3276) or visit 
http://www.selfemployedcountry.org . 

Coverage via the safety-net protections of the HIPAA may 
end up being “risk-pool” coverage. 

= Healthcare Savings Programs 

Healthcare savings programs are patient advocacy programs 
that minimize out-of-pocket healthcare expenses. 

They’re not insurance policies but rather programs that allow 
you to access networks of healthcare providers for the same 
negotiated rates that large insurance companies enjoy. 
Savings range from 20% to 50%. 

Not ideal but better than nothing. Also, since they’re not 
insurance policies, all pre-existing conditions are accepted. 

A modest monthly fee is usually required to participate. 
See, for example, Care Entree at http://www.careentree.com 
for $20 per month. 

Although health insurance may seem like a luxury you just 
can’t afford if your finances are already stretched to breaking 
point thanks to your home-based business, you never know 
what’s around the corner. Quite simply, you and your business 
can’t afford not to have health (and disability) insurance. 

You are your business’s greatest asset. Protect it. 

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