Saturday, December 14, 2013

Young, self-employed and seeking health insurance via the ACA exchanges? See an accountant

A good number of Americans who will be shopping for health insurance on the ACA exchanges are self-employed.  A 2007 Commonwealth Fund study found that 34% of buyers on the individual market for health insurance were self-employed (p.3). In 2012, about 15 million Americans were self-employed.

Doubtless many of the younger Americans subject to "rate shock" on the ACA exchanges are self-employed and earning enough to qualify for only small subsidies or none at all. For those who have not learned to max out on allowable deductions to reduce their taxable income -- e.g., everything from paper clips to home office space to computers, auto expenses and retirement fund contributions  -- the ACA adds new incentives -- in some cases powerful ones.

The ACA offers subsidies not only for premiums but for deductibles and maximum out-of-pocket (OOP) expenses. While the premium subsidies shrink at a steady rate per $1000 of income (and fade gradually to zero for a single young person), the break points for deductibles and OOP are sharper.  At some break points, a $1000 difference in reported income can mean a difference of thousands in medical expenses covered in a given year.

The most direct way for a self-employed person to reduce taxable income is through retirement fund contributions, which come straight off the Modified Adjusted Gross Income (MAGI) used to calculate ACA subsidies. So, attention young invincibles: at certain break points, it may be worthwhile to scrounge, beg or borrow an extra $1000 to contribute to a SEP-IRA or individual 401k. For that matter, anyone shopping on the exchanges should explore the effects of reducing taxable income through increased retirement contributions  -- or any other legal and ethical means.

Using the complete, accurate and easy ACA shopping function at ValuePenguin, I looked at silver plan prices for a 35 year-old single adult in my home county of Essex in New Jersey. For an income in the high teens, premiums rise about $10 per month for every additional $1,000 of income -- not super-high stakes.

HOWEVER. For a single person earning up  to $17,235, subsidies for the cheapest silver plan set the deductible at $100 and the out-of-pocket (OOP) maximum at $750.  Just over that ridge, these subsidies remain generous but fall  to a $300 deductible and $1,550 OOP max.  At $23,265 income, they jump again, to $1,250 and $3850. At $28,275, they phase out -- at which point there are substantial tradeoffs between premium and deductible/OOP costs. For the lowest-premium plan ($195.64/month), the deductible is $1350 but copays are fully 50%, to an OOP max of $5100. $218.86 a month will bring that coinsurance down to 30%, but with an $1,800 deductible.

To recap: if your first-look MAGI is $18k, and you pony up an extra $1000 (let's round it)  for your retirement account, that $1000 will save you $800 if your medical expenses are $1550 or more -- plus whatever the added contribution saves you on your tax bill (plus, you own it).  If your MAGI is $24k, and you bust it down to $23k, you save at least  $950 if your medical expenses are $1250 or more and $2300 if your expenses are $3850 or more. And if you knock MAGI down from $29k to $28k you save as well.

ACA aside, the self-employment tax provides powerful incentives for the self-employed to contribute as much to their retirement accounts as they can manage. For those buying insurance on the individual market, the ACA adds an an extra incremental -- and in some cases, massive -- incentive to do so.

See also: The ACA's subsidy cliff for older buyers               
              Self-employed? That pre-ACA health insurance tax deduction is still there

Updated 3/10/14:  previously, this post had the "cliff's edges" rounded to the nearest thousand. 

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