What are Health Insurance Premiums?
Health Insurance Premiums for Small Business Owners and Independent Contractors Guide, you are a small business owner, and You think you’re going to make maybe forty thousand. It turns out that you missed out on the cost-sharing reduction because you did not estimate that you were going to be at 40K or something. In this article, we will go deep into how to get cheaper health insurance premiums.
Health Insurance for Small Business Owners and Independent Contractors
Exploring Health Insurance Options
You have three options, the first one is the healthcare marketplace plan. You can look at some private coverage, or you can look at these cost-sharing plans that are not insurance technically. And, that fourth option is not having health coverage at all.
Understanding Marketplace Plans for Health Insurance Premiums
I want to look at what you might be missing if you’re looking at one of these marketplace plans. Depending on how you earn and how you structure your business entity throughout the year, could dictate how much you’re going to pay for one of these plans. So sometimes, you’re looking at some MSRP pricing of a marketplace plan. And they look sky-high because they are the MSRP, what you’d pay if you weren’t dealing with any of the premium tax credits or the cost-sharing reduction.
Estimating Income for Health Insurance
So, I want to talk about those two pieces because it’s going to have to deal with estimating your income. Being a small business owner, it’s likely one of the most hard tasks. And I was talking to somebody about a week ago on this and how to estimate your income, and it just was basically like, “Yeah, estimate your income on what you think you’re going to make.” And as a small business owner, that’s very difficult to project, especially if you’re just starting. You can have hopes and aspirations of how much you’re going to earn.
How Income Projections Affect Health Coverage
When I tell you that the projection you’re coming up with, the idea that you’ll just have this goal: will also affect what you pay for your health coverage. Again, I want to talk about these two parts first for the health coverage with the marketplace plans. There are two parts to the cost: the premium tax credit, which a lot of people talk about getting help for the subsidy of paying for your actual premium. So if you can get your adjusted gross income below a certain threshold, then you can get more of the premium tax credit.
Understanding the Cost-Sharing Reduction
But there’s this lesser-known part of it that not a lot of people talk about, and that is the cost-sharing reduction. So, I want to talk about both plans and estimating your income. But let’s talk about the cost-sharing reduction. So, here’s the website from healthcare.gov because who’s going to say it best but the definition?
The Impact of Income on Deductibles, Co-Payments, and Co-Insurance
The cost-sharing reduction right here says basically that you’re going to pay for deductibles, co-payments, and co-insurance. So that means you can have the same plan but pay a different co-insurance or a co-pay. So it’s saying the deductible, your deductibles could be lowered, it could be zero. You could have no deductible with the same plan depending on where your income is at, or your projected income is at versus somebody else who projected their income a little higher. They could have a higher deductible for the same plan.
The Importance of Understanding Your Plan
This is just not talked about enough that you can have the same plan. It’s not a unique set of plans; it’s the same plan. You can have the same doctors on the same plan and pay a different deductible or a co-payment or co-insurance, and it has nothing to do with the premium tax credit.
Understanding the Cost-Sharing Reduction
Cost-sharing reduction is extra savings with the cost-sharing reduction. I don’t know what the price of your cost-sharing reduction is going to be because it depends on the plans and your household size. Then, you need to navigate the actual marketplace to see what plans are even available in your specific area, and the pricing of the same plans will vary based on your location and income. So, there are so many factors that are going to affect it, but you want to pay attention to this cost-sharing reduction.
Dealing with Unpredictable Income
You’re unemployed, you’re self-employed, or on commissions. Most people who are on commissions are probably independent contractors or on a work schedule that changes regularly. That is going to be for the marketplace plans.
Guidelines for Estimating Your Income
If your income is hard to predict, this is what they’re telling you: base your estimates on your experience. So, if you don’t have any, you can’t base it on anything. ‘Recent trends,’ I don’t even know what that means. You’re just going to Google what you earn or what you know about changes at your workplace and similar information. If the job is new to you, ask people in the same field, in the same company, about their experiences. So, it’s saying you must make it.
The Impact of Income Predictions on Premium Tax Credit and Cost-Sharing Reduction
I would go through the plans multiple times and look at the different income levels. Now, what I’m just showing you is predicting your income, which will affect both the premium tax credit and the cost-sharing reduction. Now, here’s what you need to know.
Understanding the Premiums Tax Credit
The premium tax credit, if at the end of the year, let’s say that you made 10 times the amount that you thought you were going to make, and you took the premium tax credit upfront. Then you’re going to have to pay it back. Because it’s based on what you projected your federal income tax to be, what you’re going to earn. Even if you’re an S corporation owner, it does not matter because your distributions will get added to your federal taxes, which will increase your taxable income.
Repaying the Premium Tax Credit and Cost-Sharing Reduction
You’re inevitably going to pay back whatever premium tax credit you applied for and received. So, another alternative is just don’t take it upfront because when you do your taxes, if you qualify for it, then you’ll get it in a refund. That’s one thing to think about.
Understanding the Cost-Sharing Reduction
The other part is a cost-sharing reduction. So, I just walked you through the premium tax credit. If you projected X and earned 10X, so clearly, you’re not going to qualify for that amount, so you’re going to have to pay it back because your taxable income was higher. But that same estimate, if it was too low for whatever reason, you didn’t think you were going to make that much; you made a mistake, or you got most of your income in December, and so all through the year, you were struggling to get your business up and running. Maybe it’s your first or second year in business, and you’re not making a lot of money, but then suddenly, it takes off at the end of the year.
Income Changes and Their Impact on Your Health Insurance Premiums Plan
Impact on Your Premiums Plan, Your federal income tax is going to be significantly higher. In that same scenario, you don’t go back and get a new plan. You don’t have to change your cost-sharing reduction. You don’t lose the cost-sharing reduction retroactively.
A point to note:
You are required if your income increases, and you know it’s increasing, to report the change. But in the example, I just said, if it happens in December and you weren’t expecting it, you would be foolish to think in January that you’re going to make a bunch of money. If you didn’t think, you know, that was your goal.
Projections vs. Goals: A Key Distinction
There’s a vast difference here between projections and goals. Now, things that you would want to include as self-employed, a small business owner, if you’re an S corporation, you’re paying yourself a salary. So, that is what you’re going to include on day one because you’re saying to the marketplace, ‘I have a job,’ because you do. Because you’re an employee, even though you’re the employer at the same time, you’re the employee. So, that W-2 wage that is coming to you should be included.
The Challenge of Projecting Distributions
Regarding the distributions, you’re uncertain about the number of distributions in your S corporation, making it difficult to project your distributions with certainty. Now, again, you might have goals, you might have aspirations, but when the rubber meets the road, you want to make sure that you’re estimating appropriately. What doesn’t occur is if you put in what your goals are, and your aspirations, and you fall short of that, they don’t go back and then change your plan to then give you the cost-sharing reduction.
Navigating Different Scenarios in Health Insurance Premiums
There are many Scenarios for Health Insurance Premiums. Like, what if I make a ton of money in January or February? What should I put if I don’t think I’m going to make that money for the rest of the year? You’re just going to have to rework these numbers and make updates as necessary. But at the same instance, you don’t want to jump from plan to plan. Every time you jump on a new plan, you’re getting a brand-new plan, which means a new deductible and all the other stuff that goes with it.
The Importance of Accurate Estimation of Health Insurance Premiums
A self-employed or small business owner needs to avoid unexpected expenses as their annual income might fluctuate throughout the year. Overestimating could lead to overpaying and that could be a bad idea as it will result in payback subsidies. Therefore, make sure you get your estimation accurate to avoid getting a higher coverage that does not align with your income level.