One of the biggest problems self-employed people face is obtaining and paying for health insurance. Health insurance is particularly hard to come by for those with preexisting conditions. Many self-employed individuals obtain coverage through a spouse whose employer provides family coverage. Many others who don't have this option have only limited major medical coverage or go without health insurance entirely.
Fortunately, the health insurance environment for the self-employed may be about to get much better. As a result of the Patient Protection and Affordable Care Act, also known as "Obamacare," we're about to enter a new health insurance era. The Obamacare reforms should make it possible for every self-employed person to obtain health coverage, even those with preexisting conditions.
Because of Obamacare, the following momentous changes went into effect:
Change #1: The Health Insurance Mandate
The most significant change created by Obamacare is the requirement that all Americans have health insurance coverage. Prior to Obamacare, there was no federal law requiring individuals to have health coverage; nor were employers required to provide it for their employees (except in Massachusetts and Hawaii). But starting in 2014 under Obamacare, all Americans must have at least minimal health coverage or they will have to pay a penalty to the IRS. The deadline for obtaining coverage without incurring any penalty was March 31, 2014. For companies with 100 or more full-time employees, the mandate was delayed for one year and took effect in 2015. For companies with 50 to 100 full-time employees, the mandate was delayed an additional year and takes effect in 2016.
The individual health insurance mandate applies to the self-employed as well as everybody else. This is true whether you’re a self-employed sole proprietor, partner in a partnership or limited liability company, or employee of your own small corporation.
If you don't have health insurance during 2014 and later, you'll have to pay a tax penalty. The exact amount of the tax penalty is based on household income. This penalty is scheduled to be phased in over the next several years as follows:
- for 2014, the penalty is the greater of $95 or 1% of income
- for 2015, the penalty is the greater of $325 or 2% of income
- for 2016, the penalty is the greater of $695 or 2.5% of income, and
- after 2017, the $695 amount is indexed for inflation.
The penalty for children is half the amount for adults and an overall cap will apply to family payments. In addition, the penalty only applies to taxpayers who can afford insurance but do not purchase it. The Congressional Budget Offices says that of the 30 million non-elderly Americans it estimates will not have health insurance in 2016, only about six million will be subject to the tax. The remainder will be exempt because their income is too low or they qualify for another exemption. For more information, read Nolo's article on the penalty fee for the insured.
Change #2: You Can't Be Denied Coverage Because of a Preexisting Condition
To help everyone obtain coverage, health insurers are no longer allowed to deny coverage because of preexisting medical conditions. Also, health insurers are not allowed to charge higher rates based on the insured's gender or health status. Moreover, your insurer can't cancel your insurance if you get sick. Learn more in Nolo's article on the ban on preexisting condition exclusions.
Change #3: You Can Purchase Coverage Through Online Health Insurance Exchanges
To help individuals and small businesses obtain health coverage, each state is required to establish an online health insurance exchange. These exchanges will be a competitive insurance marketplace where small businesses and individuals who might not otherwise be able to afford it, can buy qualified health benefit plans.
These health plans must provide at least the following essential health benefits:
- ambulatory (“walk in”) patient services
- emergency services
- maternity/newborn care
- mental health and substance use disorder services (including behavioral health treatment)
- prescription drugs
- rehab and habilitative services/devices
- lab services
- preventive/wellness services and chronic disease management
- pediatric services (including oral and vision care).
There are four levels of coverage available, each of which covers a specified percentage of an individual enrollee's covered benefits:
- bronze, which covers 60% of covered benefits
- silver, which covers 70% of covered benefits
- gold, which covers 80% of covered benefits, and
- platinum, which covers 90% of covered benefits.
The new law also requires that plans cap the maximum out-of-pocket costs for enrollees, based on the out-of-pocket limits in high-deductible plans that are eligible to be paired with a Health Savings Account. The current limits are $5,950 for an individual and $11,900 for a family, and will be adjusted over time based on increases in premiums.
Thus, for example, a single person with a silver plan that covers 70% of expenses will pay 30% of covered expenses out of his or her own pocket through some combination of deductibles, copays, and coinsurance, up to a maximum of no more than $5,950 per year.
Although these state health insurance exchanges are supposed to be up and running in 2013, some states missed this deadline. You can find out the status of your state's exchange at the Kaiser Family Foundation website. For more information about the exchanges work, see Nolo's article on how the Health Insurance Marketplace works.
Change #4: Health Insurance Tax Credits Are Available for Low-Income People
Health insurance will be available to all self-employed individuals through the state exchanges. However, it won't necessarily by cheap. The CBO estimates that lowest-cost bronze coverage will cost $4,500-$5,000 per person and $12,000-$12,500 per family in 2016, with the costs rising thereafter.
To help middle and lower income people obtain coverage, a premium assistance credit will be provided for those who purchase health insurance from the Health Insurance Marketplace. This credit is paid directly to health insurers by the federal government. The credit is available for those whose income is between 100% and 400% of the federal poverty line. Based on 2011 poverty levels, the credit would phase out at $43,560 for individuals and $89,400 for a family of four. The most that families buying coverage in an insurance exchange would have to pay towards a health insurance premium would range from 3.0% of income at 133% of poverty to 9.5% of income at 400% of poverty.
This credit can be substantial--for example, a 50-year-old single person earning $30,000 per year could qualify for a credit of $5,865 to help pay for silver plan coverage. You can obtain an estimate of the credit you could qualify at the Kaiser Health Reform Subsidy Calculator.
There's also a subsidy for out-of-pocket costs (such as copays) for those with income under 250% of the federal poverty level. For more information on the premium credit and out-of-pocket subsidies, see Nolo's overview of the Health Insurance Marketplace.