Money Girl

How Can I Get an Affordable Self-Employed Benefits Package?

Episode Summary

Laura answers a listener's question about how to get affordable benefits when they become a full-time solopreneur.

Episode Notes

Laura answers a listener's question about how to get affordable benefits when they become a full-time solopreneur.

Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.

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Episode Transcription

Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today's topic comes from a comment from Debra E. and a question from Justin.

Debra says, "I'm reaching out to thank you for your book Money-Smart Solopreneur. I've been more reluctant than I need to be about leaning into freelance work. Your words have been an encouragement and leave me with no excuses. I'm looking forward to what's ahead!"

Justin says, "I'm starting to earn enough from my consulting side business to consider quitting my day job. If I leap into being self-employed full-time, how can I get an affordable benefits package similar to my employer's current offer?"

Thanks for your kind words and being a book reader, Debra! You summed up the reason I wrote Money-Smart Solopreneur. Many people feel intimidated or overwhelmed by the idea of creating business income. My goal for the book was to explain that becoming an entrepreneur doesn't have to be complicated, nor do you need to invest a lot of money or time to get started. I wish you all the best in your freelance venture!

Justin, I appreciate your question about going from employee to self-employed. While the traditional benefits you get at work are a nice perk, replacing them may be easier and less expensive than you think.

Whether your business is still just a dream or already providing a good income, this post will review how to create your own affordable benefits package when you become your own boss.

Welcome back, everyone, and thanks for joining me on episode 861! I'm Laura Adams, an award-winning author, finance spokesperson, money speaker, founder of The Money Stack newsletter, and host of the Money Girl podcast with 43 million downloads.

If you're getting value from the free content we love creating, consider submitting a 5-star rating or review on Apple Podcasts, Spotify, or wherever you're listening! If you have a question you'd like me to cover, please leave it on our voicemail line at 302-364-0308. You can also send an email and sign up for the free Money Stack newsletter at LauraDAdams.com.

4 Benefits Every Business Owner Needs

Whether you're a solopreneur with no employees or run a small business with staff, you need the following four benefits to protect your finances.

1. Health insurance.

If you do what Justin is considering and leap from a corporate job with benefits to working for yourself full-time, health insurance is the first benefit you'll need to replace. Yes, it will likely be the most expensive one–but I’ll give you great tips to cut the cost.

Remember that an employer’s group policy costs less than an individual policy. Plus, your employer may subsidize some of your premiums as a perk. Consider the following options when you become your own boss.

Join a parent’s plan: If you're under 26, you can join a parent's plan if they'll have you. Otherwise, you'll need to research other options.
Join a partner’s plan: If you have a spouse or domestic partner with access to a group health plan at their job, one option is to join their policy.
Purchase a COBRA plan: If you leave a group health plan, you're typically eligible for coverage through the Consolidated Omnibus Budget Reconciliation Act, or COBRA. It's a federal law allowing you to continue employer-sponsored health insurance for up to 18 months, in most cases, after you're no longer employed. You can opt to receive the same health, dental, and vision insurance as when you were employed.

The problem with COBRA is that it can be much more expensive than what you paid as an employee, and it's temporary. Other options I’ll cover will likely be much more affordable.

Purchase an ACA plan: Many entrepreneurs get health coverage through the federal or state health insurance marketplaces (depending on where you live) that were established by the Affordable Care Act. You can learn more at Healthcare.gov.

The marketplaces or exchanges sell ACA-qualified medical and dental plans that meet certain rules, like offering essential minimum benefits and not having coverage caps. However, in general, you can only buy a marketplace health plan during the annual open enrollment period from November 1 to January 15.

However, certain life events–such as losing health coverage, moving to a new state, getting married, or starting a family–may qualify you to enroll or change your marketplace plan outside open enrollment.

So, if you left a job and no longer have health insurance, you qualify to shop for a marketplace health plan. However, if you’ve been uninsured before starting your business, you must wait for open enrollment, unless you have a qualifying life event. But I’ll tell you about other options you can purchase any time of the year in a moment.

When you shop ACA-qualified health plans, the application helps you determine if you qualify for a premium tax credit, which reduces your monthly payments based on your household’s modified adjusted gross income (MAGI) and family size. If you have a low income, you'll also know if you're eligible for free or low-cost coverage through your state's Medicaid and Children's Health Insurance Program (CHIP).

In general, if your household income is 100% to 400% of your state’s poverty level, you’ll qualify for a tax credit based on a sliding scale. For example, if you’re single and earn less than about $58,000, or have a family of four and earn less than $120,000, your premiums may be reduced. If you earn over the income threshold, you don’t qualify for a subsidy and must pay full price.

Once you choose a marketplace plan, you must estimate your net self-employment income for the year you need coverage, not the prior year. But it's important to understand that if your income estimate is too low, you'll qualify for lower marketplace health insurance premiums, but will eventually have to repay any excess subsidy on your next tax return.

And if you overestimate your income, your premiums will be higher, but you'll likely get a refund on your next tax return. So, try to be as accurate as possible so you don't have a large, unexpected tax bill.

Purchase a self-funded plan: As a business owner, you have more options for health coverage. For example, Solo Health Collective is a nationwide PPO network plan designed exclusively for self-employed business owners. You can learn more at HBGSolo.com.

To establish a plan, you must be a sole proprietor with an EIN (employer identification number) and pass a quick health questionnaire. Although everyone may not be eligible, if you’re generally healthy, Solo Health Collective may be a more affordable option.

They offer three PPO plans with deductibles of $2,500, $5,000, or $10,000. Similar to ACA plans, an HBG Solo health plan covers preventative services prior to and after you meet your deductible, and has no annual or lifetime limits on benefits.

Unlike ACA plans, Solo’s deductibles are the same as your out-of-pocket maximums. That means once you hit your deductible, claims for covered services are generally paid 100%.

Plus, you can choose from two HSA-eligible options, allowing you to save even more money by paying your deductible and any out-of-pocket costs using a tax-free health savings account that you set up and control.

I recommend comparing a couple of health plan options so you fully understand the coverage range and prices. Health insurance can be expensive, but it pales when compared to potentially massive medical bills you could face after an accident or significant illness. So, make getting a good health plan a top priority when you're self-employed.

2. Life insurance.

Many employers offer term life insurance with a benefit that's one or two times your annual salary, with an option to purchase more. However, they typically cancel your policy at the end of the month you leave your job.

First, consider if you need life insurance when becoming self-employed. Its purpose is to protect anyone who depends on you financially, such as a spouse, partner, child, or aging parent, after your death.

If you have a young family, you likely need life insurance at least ten times your annual income. If you're in relatively good health, finding an affordable life policy may be easier and less expensive than you think.

There are two main types of life insurance: term and permanent.

Term life insurance provides a benefit upon the death of the policy owner for a set period, such as 10 or 20 years. It's inexpensive and gives you the most benefit for the dollar. For example, if you're in your 30s and in good health, a 20-year, $500,000 policy may cost about $200 a year.
Permanent life insurance provides a death benefit no matter when you die. It includes various products such as whole, universal, and variable life, which accumulate a cash value differently. While it costs much more than term, if you have dependents who need support no matter when you die, a permanent life policy may be essential for their financial futures.

You can shop and compare term and permanent life quotes at sites like Policygenius and USAA.

LISTEN ALSO: Who should buy cash value life insurance?

3. Disability insurance.

Disability is another coverage you typically purchase through an employer that gets canceled when you leave your job. It's often overlooked by the self-employed, but it is essential.

Did you know that one in four of today’s 20-year-olds will become disabled before reaching retirement age? Remember that health insurance pays a portion of your medical bills, but not living expenses, like housing or food, if you can't work for an extended period.

A disability policy pays a percentage of your gross income, such as 60% or 70%, if you can't work due to a covered disability, illness, or accident.

Some states offer a disability program for workers and the self-employed who pay into the system. If you can get disability coverage from your state, it may be less expensive than a private policy, but you should shop and compare both options.

Some great places for disability quotes are Policygenius and Metlife.

4. Retirement plan.

Another essential benefit you'll need after becoming self-employed is a retirement account. You have excellent options to invest for the future, even when you don't have a day job with a 401(k).

Consider the following tax-advantaged retirement plans for entrepreneurs.

Traditional IRA (individual retirement account) – is for anyone with earned income or a spouse with income (if you file taxes jointly). Traditional IRA contributions are tax-deductible, reducing the amount of income on which you pay tax.

The only downside is that if you or a spouse also participate in a workplace retirement plan, like a 401(k) or 403(b), some or all of your traditional IRA contributions may not be tax-deductible.

IRAs have low annual contribution limits compared to other retirement options for the self-employed. For 2024, you can contribute up to $7,000 or $8,000 if you're over 50.
Roth IRA – is for anyone with earned income up to certain limits. Roth contributions are taxed, but withdrawals during retirement are entirely tax-free. You get the full tax benefit even if you or a spouse participate in a retirement plan at work.

For 2024, you can contribute up to $7,000 or $8,000 if you're over 50 to a traditional or Roth IRA.

SEP-IRA (simplified employee pension)– is an IRA for anyone self-employed without or with employees. Contributions can only come from an employer—employees can never contribute their own money. So, as a business owner, you choose the amount to contribute each year.

For 2024, you can make SEP-IRA contributions for each of your employees

(including yourself) up to 25% of compensation for a maximum of $69,000. You

can also max out other accounts, including a traditional or Roth IRA and a retirement plan with another employer, such as a 401(k).

Solo 401(k) – is a 401(k) for anyone self-employed with no employees other than a spouse. As both the employer and employee in your business, you can make both kinds of contributions, allowing you to contribute more than with any other retirement account.

For 2024, on the employee side of a solo 401(k), you can contribute as much as 100% of your salary up to $23,000 or up to $30,500 if you're over 50. Plus, as the employer, you can contribute up to 25% of compensation if your total contributions don't exceed $69,000 or $76,500 if you're over 50.

You can also have a solo 401(k) and a traditional IRA or a Roth IRA. However, depending on your income and tax filing status, some or all of your contributions to a traditional IRA may not be tax deductible.

Consider platforms like Betterment or Vanguard for setting up one or more retirement plans.

If you need help setting up a retirement plan or information about using multiple plans properly, be sure to contact a qualified tax accountant. They can help you maximize tax benefits for your business and retirement accounts.

The bottom line is that you don't need a traditional job to enjoy an excellent benefits package. In fact, when you create your own, you can customize it any way you like. The benefits here aren’t the only ones you may need. For instance, you could need business or commercial auto insurance, depending on your entrepreneurial work.

Do your homework, shop around, and factor the costs of self-employed benefits into your business. Don't let creating your own benefits package be a stumbling block to becoming an entrepreneur.

Before we go, here's a quick reminder to subscribe to The Money Stack, my weekly newsletter, when you visit LauraDAdams.com. It's filled with money tips, tools, news, challenges, and things I enjoy! You can subscribe for free or become a paid member with access to live educational events.

That's all for now. I'll talk to you soon. Until then, here's to living a richer life!

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