Smart Answers

Why It's So Tricky for the Self-Employed to Estimate Health Insurance Costs


Question: Thank you for your article on how the self-employed can calculate eligibility for Obamacare subsidies. I now understand it is line 37 instead of line 22 on my 1040 tax return. This is a relief, as I will be qualified. Since my MAGI [modified adjusted gross income] varies year from year, depending on the level of business contracts and projects I receive, does that mean I will be paying different premiums or rates and receiving different subsidies every year?

Answer: Yes; it most likely does. Having insurance costs change each year, however, is probably not going to come as a shock to most people, including the self-employed who buy private insurance. Most of us already pay different premiums from year to year, depending on whether our insurance companies raise (or, in rare cases, lower) rates and whether there are changes in our families that affect our policies, such as adding a new family member or taking one off the insurance policy.

Also, health-care costs in the U.S. have been increasing over nearly five decades. Just in the past 10 years, premiums for employer-sponsored family coverage have increased 80 percent, nearly three times as fast as wages or inflation, according to the Henry J. Kaiser Family Foundation. The 2013 increase of 4 percent was considered moderate.

The greater difficulty for the self-employed may come in calculating what you will owe from year to year and how much you’ll qualify for in subsidies or tax credits. That calculation can be particularly complex for the self-employed for exactly the reasons you mention: You may land large projects at any time during the year that will increase your income, lose expected work, or incur higher-than-expected expenses that will reduce your MAGI substantially.

Here’s how it all works, according to Sarah L. Fowles, an employment benefit attorney at Quarles & Brady in Milwaukee. “At the time you apply for insurance through an [Obamacare] exchange, the exchange will estimate your credit based on your family composition and estimated household income for the year. You may then elect to receive advance payments of the credit that are made directly to your insurance company, or you can pay the full premiums and claim the credit when you file your tax return for the year, which would lower the taxes you owe or increase your refund,” she says in an email.

If you elect to take advance payments of the credit as a subsidy that lowers your monthly insurance premium, you will have to reconcile the credit you received with the credit you actually qualified for based on your actual MAGI for the year—if it differs from what you predicted. “Depending on whether your MAGI was underestimated or overestimated, this reconciliation can result in additional taxes owed or can lower the taxes you owe or increase your refund,” Fowles says.

If you qualify for premium assistance credits based on projected income, the credits received will be reported on your tax return for the year you projected and reconciled with the amount you should have received based on that year’s actual income. If you make more than you expected, and you’re not eligible for the full amount of subsidy you received, you may have to repay some of that money. Repayments are capped at between $300 and $2,500, depending on how much your total MAGI was for the year, says Adam June, a partner at the Weltman Bernfield accounting company in Buffalo Grove, Ill.

Katie Vlietstra, vice president for government relations and public affairs at the National Association for the Self-Employed (NASE), points out another particular challenge for the self-employed: predicting income for the upcoming year. “Premium assistance [commonly known as a subsidy] is calculated on anticipated [income], therefore if you make more than you originally predicted, you will be required to pay back the premium difference when you file your income tax returns,” she says in an e-mail. “The NASE is working with lawmakers to base premium assistance calculations on the previous year, giving at least a little bit of consistency to the calculation.” While that solution is not perfect, she says, it’s likely to be a better predictor for what an individual or family will be expected to pay than a pure estimate.

Here’s some more background information that may prove helpful: healthcare.gov, the federal Obamacare website, addresses self-employment here. This University of Nebraska site includes information on the premium tax credits and how they can be taken as advance premium subsidies. MAGI is defined, for purposes of Obamacare, by the University of California, Berkeley’s Center for Labor Research & Education here (pdf).

Karen_klein
Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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