Health Insurance for the Self Employed
Copyright © 2003, Daniel Lamaute
Lamaute Capital, Inc.
Health insurance, having enough and
being able to afford it, is one of the most nagging concerns for
those who leave corporate America to run their own business.
Many small businesses have dropped
health coverage or reduced it in the past three years because
of rising rates. About 24 million of American small-business employees
and their families are uninsured, according to a study by the
Kaiser Family Foundation.
The Consolidated Omnibus Budget Reconciliation
Act (COBRA) is a federal law that requires employers to allow
departing workers to buy health insurance through the employer's
group plan. For the first 18 months after you leave your employer
you may elect to continue to receive coverage in your employer's
group plan at your expense.
However, the cost of the monthly premiums
for COBRA can come as quite a surprise if you're accustomed to
you employer picking up most of your health insurance tab via
pretax paycheck deductions. COBRA coverage for a family can run
$500 a month, and upwards of $200 a month for an individual.
Depending on which State you live
in COBRA may not necessarily be the best deal for you. Shop around,
you may find joining a short term insurance plan to be less expensive
than continuing your current insurance under COBRA.
One piece of good news for the self-employed
- Starting in 2003, the self-employed health insurance deduction
is increased to 100% from the 70% that was deductible in 2002.
As a result, if you work as a consultant, freelance worker, and
other self-employed individual you will be allowed to deduct all
of your health insurance premiums. The self-employed health insurance
deduction is especially valuable because it is an above the line
deduction for Adjusted Gross Income (AGI). This means that you
can take advantage of this deduction even if you do not you itemize
your deductions on your tax return.
Even with health insurance the portion
of medical expenses that has to come out of your pocket can be
more than you imagine. If you have to dip into your retirement
savings for certain medical expenses, distributions from your
IRA used for that purpose may be exempt from the IRS 10 percent
early withdrawal penalty. However, you still will have to pay
taxes on the IRA distribution. Another alternative is to transfer
your IRA to a Self-Employed 401(K) plan and take a loan from that
plan. Loans from a 401(k) plan are tax-free and penalty free as
long as the loans are paid back.
Daniel Lamaute is a retirement plans specialist with Lamaute Capital.
Its website http://www.investsafe.com
covers retirement plans and other benefits for the self-employed.
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