We know that the workforce has changed dramatically in the US in recent years. More than 10 million workers, which are about 7.4 percent of the US workforce, are now classified by the Bureau of Labor Statistics as independent contractors. Further, there are also another 4 million workers who have alternative work arrangements in which they may be legally classified as independent contractors for one or more purposes. That is a whopping $626 billion in personal income, or about one in every eight dollars earned in the US for 2010.
So what words put fear into the hearts of this large section of workers? The words “Affordable Health Care Act.” And, there is good reason for this fear. The Act does not just address healthcare, it changes a lot of the basic concepts of health insurance for many workers—and it can affect your US income tax. But the law is not all bad. There are a lot of bonuses that come with the legislation, along with a lot of planning that needs to be done.
The Good Side
First, the new US income tax on the failure to buy health insurance provides encouragement for individuals to obtain insurance. To the extent that contractors have avoided purchasing health insurance, the threat of a penalty (as the Act calls it) or a tax (as the Supreme Court calls it) may encourage many to start their search.
The law helps those who have had problems obtaining insurance. Eliminating lifetime coverage limits and the phase out of annual limits, to be completed in 2014, are real pluses. Beginning in 2014, no one can be denied coverage due to a pre-existing condition or have coverage that excludes benefits for a specific medical condition.
The law also helps parents. The provision prohibiting discrimination against those with pre-existing conditions, who are under 19 and inclusion of children up to age 26 as covered individuals on their parents’ policies, may benefit many when purchasing a family policy.
The Bad Side
There is a cost to all of this. Those without health insurance coverage will either have to obtain qualifying coverage or pay a tax. The tax starts in 2014, and rises until 2016, when a married couple would pay a surtax equal to the greater of $1,360 or 2.5 percent of adjusted gross income.
High-Income Individuals Will See a Rise in Taxes to Fund the Act’s Provisions.
- Individuals making more than $200,000 and couples making more than $250,000 will pay a Medicare surtax of 3.8 percent on their investment income, plus an additional 0.9 percent Medicare payroll tax beginning in 2013. This may make your Subchapter S and partnership income subject to these taxes. So think about purchasing health insurance through the company.
- Beginning in 2018, there will be a new 40 percent excise tax on high-cost health insurance plans. A high-cost health insurance plan includes a plan with premiums of at least $10,200 for Single coverage, or $27,500 for family coverage. These amounts will not be adjusted for inflation through 2018. This means that as health insurance premiums rise from now through 2018 more health insurance plans will fall into the “Cadillac” plan classification. So be careful about how comprehensive your insurance is.
The Tax Hikes to Fund the Act Are Not Limited to High-Income Earners. Middle- and Low-Income Earners are Affected as Well.
- The limitation on contributions to flexible health care spending accounts of $2,500 makes more income subject to both US income taxes and Social Security taxes. The additional taxes that have to be paid can be substantial for individuals who have high-deductible health insurance plans and who are funding the out-of-pocket costs with flexible spending accounts. So incorporated contractors may need to relook at their set-up and purchase more comprehensive insurance.
- The increase in the itemized deduction floor from 7.5 percent to 10 percent that applies to medical expenses that begins in 2013 effectively eliminates medical expense deductions for most working people with health insurance. Changing from a high deductible insurance policy to a more comprehensive one that costs more may have a positive effect on the tax situation.
The Next Question, of Course, is Where to Get Insurance.
The options are actually plentiful.
- If you already have some types of insurance (homeowners, life, or auto), contact your carriers and see if they have health insurance policies for self-employed individuals. Many times you can get discounts for multiple policies.
- If you are leaving an employer that offered group health coverage, you may be eligible for COBRA coverage. Although expensive, if your former employer paid part or all of your insurance premium, COBRA coverage can still be less expensive than individual health coverage.
- Call around. Check with major health care carriers and find out what individual policies they offer, there are a lot of different types and options – once you know what is offered you can compare it to what you really need.
- Call your University!! Check with your alumni association and see if they have a group policy you can join.
- Look at all those memberships and associations. Call or look at the websites; see if they have group policies for which you are eligible. Most professional associations have health insurance options.
- Check with companies you work with. Many companies are working with their insurance agencies to help their sub-contractors to obtain insurance. Working Today, a New York-based nonprofit, is an example. They help their partner corporations provide portable health insurance and other benefits to independent workers.
- Finally, contact your state insurance department. They can usually give you recommendations on insurance carriers in your home area.
When You Do Find a Policy – Do Not Sign Blindly Because the Price is Right. Make Sure the Policy Provides Coverage in All States or Locations You Will Need To Be.
- Understand the length of time the insurance will be in effect. Available options offered include short-term, intermediate-term, and permanent polices.
- Make sure the policy covers what you need. There are also policies for catastrophic major medical coverage, and discount prescription plans.
- Finally, check out the insurance carrier you decide on before signing any paperwork.