Self-employed individuals and small business owners do have health insurance alternatives, though finding affordable and comprehensive health, dental and other insurance coverage for a particular individual or employee group can often be a challenge depending on pre-existing conditions and other factors.
In terms of alternatives, while the business structure can affect the tax treatment of fringe benefit plans and the IRS has various rules with respect to accident and health plans in particular, one type of plan that is popular with self-employed business owners is a Section 105 HRA or medical reimbursement plan. A Section 105 medical reimbursement plan is any plan or arrangement established in accordance with Internal Revenue Code Section 105 under which an employer reimburses an employee for uninsured health or accident expenses incurred by the employee or their dependents. Section 105 allows a 100% deduction for health insurance premiums and even allows companies to write off other non-insured medical, dental and vision expenses as well. Employees, including owner-employees, must draw a regular W-2 salary or wages from the business in order to qualify as employees under the IRS rules, but in most situations employers and employees can save Federal, State and Local income taxes, FICA (Social Security and Medicare) taxes, workers’ compensation, unemployment taxes, and state disability insurance (where applicable) payroll taxes with a Section 105 plan. Due to the IRS limitations on health insurance and other medical expense deductions for the self-employed, a self-employed business owner who can legitimately employ his or her spouse as a W-2 employee and provide him or her with health insurance coverage through the business, which includes dependent coverage for the owner and other family members, will find a Section 105 plan particularly appealing. However, it is important to note that more than 2% of S Corp owner-employees generally cannot participate in a Section 105 plan, and if they do, any benefits provided under the plan to the owner-employee and his or her spouse and dependents must be included in the owner-employee’s W-2 compensation as taxable wages.
Even if a Section 105 plan is not an option, provided all of the IRS qualifications for claiming the self-employed health insurance deduction are met, self-employed business owners (i.e. sole proprietors, partners, shareholder-employees of S corps, and LLC members) can generally deduct 100% of the cost of their medical insurance premiums, including coverage for their spouse and dependents, as an adjustment to gross income on their personal tax return, Form 1040. You can review IRS information on the Self-Employed Health Insurance Deduction at:
Another option is the Health Savings Account (HSA) approach. The HSA approach provides an opportunity for cash savings by combining a high deductible health insurance policy with an IRA type savings account that individuals can use to fund their out-of-pocket medical and dental expenses.
With an HSA plan, an individual purchases an HSA qualified high deductible health insurance policy, also referred to as an HDHP, and then establishes an HSA with a bank or other authorized provider. The individual then funds the HSA in an amount up to the IRS annual limit (see website below for the 2013 limits) and then uses the funds in the HSA to pay for qualified medical expenses that are not covered by the HDHP. Except in very limited circumstances, the funds held in an HSA cannot be used to pay the premiums for the HDHP. Subject to the IRS rules, contributions made to the HSA are tax deductible, earnings on those contributions grow tax-free, and distributions from the account are tax-free provided they are used to pay for qualified medical expenses. Also, the right HSA plan program has to include a good PPO so that costs have been pre-negotiated with the health care providers. For more information, you can review HSA discussions and search for HSA providers in the Yellow Pages or on the Internet. The following are example discussions:
If cost is a major constraint, you could look at a catastrophic coverage plan with a very high deductible and relatively low cost and supplement that coverage with a health discount card that would provide PPO discounts. For as little as $15 to $20 per month, you can get significant discounts on healthcare costs through participation in a PPO. While this is not insurance, it is an excellent way to contain costs for those without adequate coverage. For an example, go to:
Federal individual mandate: The recent Patient Protection and Affordable Care Act includes an individual mandate that may also be a consideration in your search for affordable health insurance. You can review the following state and industry information that explains the individual mandate and the potential penalties for not having health insurance that start in 2014 and the federal and state health insurance exchanges designed to help individuals buy affordable health insurance: