On the surface, self-employed retirees seem to have the same options for health care as employees. Most will enroll in Medicare, purchase supplemental health insurance and (hopefully) buy some form of long-term care coverage.
Still, there are a few nuances that advisors and their self-employed clients should understand. Purchasing insurance before retirement can be a bit confusing, particularly for small-business owners (SBOs) who offer group plans. And transitioning to Medicare isn’t always as simple for entrepreneurs as it is for those employed by others. Plus, without employer-matched 401(k)s, sole proprietors need to consider more efficient funding vehicles for retirement health care costs.
Just as important are the gaps and overlaps between retirement and Medicare eligibility – tricky situations for many seniors, especially the self-employed. Given the growing prevalence of self-employment, contract work and consulting, these are situations every advisor should understand.
Pre-retirement insurance options
Depending on when your clients become self-employed, you may need to help them find health insurance well before they qualify for Medicare.
“If they have no employees, they’re purchasing privately, whether it’s on or off the ACA exchange,” says Jae W. Oh, CFP, managing principal of GH2 Benefits.
Of course, given a certain set of benefits, individual plans will always be more expensive than group coverage – a critical consideration for clients with big ambitions and modest portfolios.
For SBOs who want to offer group coverage (and use it themselves), options have recently expanded. Businesses with fewer than 25 employees may qualify for a small business health care tax credit worth up to 50 percent of their premium costs. Previously, eligible plans were only available through the Small Business Health Insurance Options Program (SHOP) Marketplace at Healthcare.gov. Starting January 2018, however, a wider variety of plans will be available directly through brokers.
“You can also take that credit as premiums are incurred, as opposed to reconciling at year’s end,” says Oh. “A high-quality plan for a 64-year-old person could be $1,000 per month.”
In a company with multiple pre-retirees and heads of household, those monthly premium credits could make a major difference in an SBO’s cash flow – and, ultimately, their retirement prospects.
More and more often, seniors are working past 65 – and the entrepreneurs among them are certainly no exception. For self-employed clients with no employees, Medicare’s federally regulated options and relatively low costs are often ideal. Like private insurance, Medicare premiums are also deductible for the self-employed.
“As soon as you have even one employee, however, complications start to take effect, especially if you’re subject to IRMAA” says Oh. IRMAA, or the income related monthly adjustment amount is an additional cost for high earners, and a client with a high-six-figure income could pay more than three times the base 2017 Part B premium of $134.
“When you add the [Medicare] supplement price and other costs, it could be more expensive to go on Medicare because you don’t get the tax credit,” Oh adds. “Fortunately, Part B can be delayed. If your company provides health insurance – whether you’re the employer or employee – you can defer your enrollment without incurring a penalty.”