Obamacare & the Self-Employed
About 23 million Americans are currently self-employed and these workers are more likely to lack health insurance when compared to all other workers on a national level.1 Entrepreneurs may be unable to afford to purchase health plans for themselves or they may be denied health coverage due to pre-existing conditions.
The full scope of the Affordable Healthcare Act (ACA or Obamacare) will go into effect in January 2014. The ACA requires mandatory health insurance, meaning that those without coverage will need to pay a penalty. This includes consumers who are self- employed or own a small business, defined by the ACA as companies with less than 50 full-time employees or the part-time equivalent. Small business owners are not required to offer or subsidize health insurance to their employees under the ACA.
The Health Insurance Marketplace, also known as the state exchange offers four tiers of metal plans, all of which are required to provide the same essential health benefits (however, the premiums among these plans vary). Insurance companies are required to approve coverage to all applicants and cannot charge higher monthly premiums to those with pre-existing conditions. Tax credits or federal subsidies may be available to the self-employed and will be dependent on income levels.
Self-employed individuals that have a fluctuating income will need to be as accurate as possible when reporting their income to the state exchange. When purchasing plans through an exchange, the amount of premium tax credits is determined by the consumer’s annual income. If this income is reported incorrectly, the difference will be reconciled by the IRS when annual income taxes are filed. Consumers who inaccurately report their annual income may find that they owe more in taxes or that their subsidies were underpaid during the year.
Taxpayers will be responsible for accurately estimating their own income when establishing eligibility for tax credits. Assistance in estimating income is available from the state exchange website. Additionally, it is advised that individuals that expect fluctuation in their income monitor it carefully throughout the year. Any changes in income should be promptly reported to the state exchange so that subsidies can be adjusted accordingly.
One study suggests that changes to healthcare pricing and eligibility mandated by the ACA may increase self-employment nationwide by as much as 1.5 million workers.2 Some workers within the U.S. economy experienced “job lock” in the pre-ACA health insurance market, a phrase used to describe the situation where consumers stay in an unsatisfying job because it provided health insurance and privately purchased health insurance was not an option due to the risk of application rejection or unaffordability. With the implementation of the ACA mandates, these workers can purchase health insurance without risk of application rejection and, therefore, may be be more likely to consider self-employment.
Small businesses which have under 25 full-time employees may be eligible for The Small Employer Health Insurance Tax Credit. This program offers financial assistance from the federal government to help pay for health insurance premiums. Through 2013, eligible for-profit businesses can claim a credit of up to 35% of their health insurance expenses, an amount that increases to a 50% credit in 2014. Tax-exempt organizations may receive a 25% credit, which would increase to 35% in 2014. The Internal Revenue Service can provide further information on determining eligibility for small business owners.