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.”
Still, Oh warns, private coverage may not be enough in a health care crisis.
“You can have a conflict where it seems more economical to stay with a private plan and defer Part B, but the moment you start incurring health care costs, the private plan is inferior to a high-quality Medicare configuration,” he says.
Ultimately, you’ll need to help your clients consider not just their premiums, but the realistic costs they’ll incur given their health and family histories.
A younger spouse can also complicate matters. COBRA usually covers a spouse for up to 36 months after an employee retires, drops coverage and enrolls in Medicare. For self-employed seniors and SBOs with fewer than 20 employees, however, COBRA laws don’t apply.
“For now, that 63-year-old spouse could just get a private plan,” says Oh. “But the entire decision tree could be altered if the ACA changes, and insurance could become so prohibitively expensive that the transition to Medicare might have to be delayed until that spouse turns 65.”
HSA: The ideal self-employed savings vehicle?
The health savings account is one of the best funding vehicles for retirement health care expenses, from which self-employed clients may benefit even more than retiring employees. Contributions, growth and withdrawals are all tax-free, and funds can be used for qualified expenses before or after retirement.
“One thing that people also don’t understand is that HSAs can be used to pay the Part B premium,” adds Oh.
While employer matching makes the 401(k) a better choice for some employees, self-employed clients have little to lose by prioritizing HSAs over other retirement accounts.
Still, clients should understand that only high-deductible health plans qualify them for HSA contributions in the first place. As of 2017, the minimum deductible is $1,300 for individuals and $2,600 for families. Are higher out-of-pocket costs worth the ability to efficiently save for Medicare, prescription drugs and other retirement health care expenses? Again, you’ll need to help your self-employed clients understand their options.
Your chance to add value
Self-employment and contract work are on the rise — and more and more seniors will have to navigate the complexities of individual health insurance and small group plans along with transitioning to Medicare while working.
By 2020, in fact, more than 40 percent of the American workforce – 60 million people – may be self-employed. For advisors, this is a perfect opportunity to add value and capture clients.
“For people who value their businesses, the health care cost issue is so big it affects the performance of their companies, and it can alter their selection of advisor,” says Oh. “When I help people on their number one project in life to such a degree, giving them advice on other matters has not been a difficult ask at all.”