The tax rules for deducting premiums paid by self-employed individuals have not changed. They continue to be deductible from gross income without any dollar limit (other than the requirement that premiums are less than net earnings from self-employment). What’s more, out-of-pocket expenses can be taken as an itemized deduction if all unreimbursed medical expenses exceed 10% of adjusted gross income (7.5% of AGI for those 65 and older).
What has changed, and quite significantly, is the mandate for coverage, how insurance is obtained, and what it costs.
Mandate. Starting in 2014, you must carry minimum essential coverage or pay a premium. The penalty is the greater of $95 per adult ($47.50 per child up to age 18) or 1% of your family income (this is not the same as adjusted gross income or taxable income). Thus, if you’re single and self-employed, you’ll pay more than $95 as a penalty once your household income exceeds $9,500. The penalty is reported on your 2014 federal income tax return, which is filed in 2015. However, due to the inability of individuals to access the federal government’s website for shopping for coverage (www.healthcare.gov), there could be either a delay or waiver of this penalty for 2014.
Obtaining coverage. Self-employed individuals who do not have medical coverage from Medicare or other government program and are not covered by a spouse’s employer’s plan must obtain minimum essential coverage on their own. This can mean agreeing to a new plan offered by their existing carrier which meets Obamacare requirements, whether or not they need or want the full extent of this coverage. Alternatively, they can shop for a plan through the individual health care change, which is either the exchange in their state or, if their state does not offer one, then the federal exchange is HealthCare.gov.
The federal government has promised that its exchange, which has been a debacle for its crashes, security breaches, and confusion, will be fully functional by the end of this month. This remains to be seen, so stay tuned!
Cost. Because minimum essential coverage must include an array of benefits and services, including well-baby care, maternity care, and pediatric dentistry (and you can’t decline this coverage even if, for example, you’re a single male with no children or a menopausal woman with no young children), the cost for this coverage doesn’t come cheaply. When shopping for coverage, check the total cost of the plan to you:
- Annual premium. Premiums have consistently risen year over year, but the jump for 2014 likely will be significant because of minimum essential coverage.
- Co-payments. What is your share for each service you obtain (e.g., a doctor’s visit; medications).
- Cap on deductibles. There is an annual limit on how much you can be out-of-pocket before your coverage pays for additional costs. Anecdotal reports say the caps for many self-employed individuals (who have individual coverage) have doubled or even quadrupled.
- Lifetime cap. While the policy can no longer fail to pay after a certain dollar amount, the lifetime payments may not necessarily be at 100%. Some plans are only offering unlimited coverage at 70%. This means that a self-employed individual could face serious financial exposure if there is an expensive, extended illness or accident.
From a business perspective, likely you’ll want coverage for yourself as a way to stay healthy so you can work. From a financial perspective, if your health coverage costs go up, you’ll need to adjust your budget accordingly. This may mean limiting or cutting back on business or personal expenditures in 2014. The sooner you face the new health care reality, the easier it will be to make the necessary adjustments.