What Obamacare Means to the Self-Employed

From the health insurance mandate to tax credits, there are big changes in health care under Obamacare.

Unlike virtually every other industrialized nation in the world, the United States has never had a national universal healthcare coverage program. The elderly obtain federally subsidized coverage through Medicare, while the poor may obtain free or low-cost coverage through Medicaid funded by the federal government and the states. However, the majority of Americans obtain their health insurance through their employers. This system may work out for many employees, but it has never been great for the self-employed.

Indeed, for decades, one of the biggest problems faced by the self-employed—particularly those with preexisting conditions--was obtaining and paying for health insurance. Many self-employed individuals obtained coverage through a spouse whose employer provided family coverage. Many others who didn’t have this option had only limited major medical coverage or went without health insurance entirely. And, the inability to obtain affordable coverage kept many people chained to jobs that provided them with health insurance, rather than striking out on their own and becoming self-employed.

Fortunately, as a result of the Affordable Care Act, popularly known as "Obamacare," the health insurance situation for the self-employed has changed radically—largely for the better. Because of Obamacare, it is now possible for every self-employed person to obtain health coverage, even those with preexisting conditions. Such coverage can be expensive, but healthcare subsidies are available to help lower income people pay for coverage.

This article covers four momentous changes that went into effect on January 1, 2014. The first of these changes described below, the individual health insurance mandate, was repealed by the Tax Cuts and Jobs Act, effective in 2019. The other three items described below are unchanged and remain in effect.

Change #1: You Are Required to Have Health Insurance or Pay a Penalty (through the end of 2018)

The most significant change created by Obamacare was the requirement that all Americans have health insurance coverage. Before 2014, 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 under Obamacare as first enacted, all Americans were required to have at least minimal health coverage. This remains in effect through the end of 2018.

The health insurance mandate applies to the self-employed as well as to 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 obtain health insurance, you'll have to pay a penalty to the IRS when you file your tax return. The exact amount of the penalty is based on your household income. Most people who fail to obtain qualifying coverage during 2018 will have to pay a penalty of $695 per adult and $347.50 per child under 18 (up to a maximum of $2,085 per family). The penalty amount is pro-rated based on the number of months during the year that you're uninsured. You will not be subject to the penalty if you're uninsured for less than three months during 2018.

The penalty only applies to taxpayers who can afford insurance but do not purchase it. Low-income individuals are exempt from the penalty, and there are several other exemptions as well. For details, see the healthcare.gov website.

The Tax Cuts and Jobs Act, enacted into law in December 2017, eliminates this key provision of Obamacare. This is likely to have a profound effect on the cost of health care over time because it is expected that many younger healthier people will choose not to have health insurance which will increase costs for everyone else. For updates on Obamacare under the Tax Cuts and Jobs Act, see How Does the Tax Cuts and Jobs Act Affect Obamacare?

Change #2: You Can't Be Denied Coverage Because of a Preexisting Condition

In the past, health insurers would often deny coverage to individuals with preexisting health conditions or charge them substantially higher rates than those charged for healthy people. Insurers could, and would, cancel coverage for people who got sick. All of these practices were banned by Obamacare. Health insurers are not allowed to charge higher rates based on the insured's gender or health status, and your insurer can't cancel your insurance if you get sick.

Change #3: You Can Purchase Coverage through an Health Insurance Exchange

Obamacare also revolutionized the way individuals and businesses can purchase health care. It established online health insurance exchanges (also called marketplaces) through which people can shop for the coverage available in their area and then apply online. A majority of states use the federal exchange at www.healthcare.gov; but several have their own state exchanges. You’ll be directed to the appropriate exchange website from the healthcare.gov website.

The health plans available on these exchanges must provide at least the following essential health benefits:

  • ambulatory (“walk in”) patient services
  • emergency services
  • hospitalization
  • 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 cover 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.

Obamacare 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. Thus, for example, a single person with a silver plan that covers 70% of expenses must 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 $6,550 per year in 2016.

You may purchase health insurance through your state health exchange only during the annual open enrollment period. For 2016, this was November 1, 2015 through January 31, 2016. After the open enrollment period ends, you may obtain coverage only if you have a life change that gives you a special enrollment period—for example, you move, lose your health insurance, get married or divorced, or have a baby. You can also get Obamacare coverage anytime you qualify for Medicaid in your state.

Change #4: Health Insurance Tax Credits Are Available for Low-Income People

Health insurance is available to all self-employed individuals through the state exchanges. However, it won't necessarily by cheap. To help lower income people obtain coverage, Obamacare includes a premium assistance credit for those who purchase health insurance from a state exchange. This credit is usually 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 2016 poverty levels, the credit phases out at $47,080 for individuals and $97,000 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 an annual credit of almost $4,000 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.

For more information, see HealthCare.gov and How Does the Tax Cuts and Jobs Act Affect Obamacare?

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