Posted by Kristie Arlsan - Did you know that there are over 22 million Americans that are self-employed? And in this economy that number is growing larger every day. You would think that with so many Americans taking care of their families and creating jobs through self-employment, Congress would be certain to pay more attention to the needs of this growing demographic. Unfortunately, that is not the case, especially when it comes to health reform.
There are two items of importance to the self-employed that are glaringly absent from all of the reform proposals currently being put forth by Congress. One missing item is a fix for the deductibility of health insurance for the self-employed. Under the current tax code, corporations are able to deduct health insurance premiums as a business expense and to forgo payroll taxes on these expenses. In addition, their employees are able to pay for health coverage with pre-tax dollars. However, sole proprietors are unable to deduct premiums as a business expense. Since they do not receive this deduction, they are required to pay significantly more in self-employment tax, their payroll taxes. How much is the extra tax each year? The self-employed must pay 15.3% in self-employment taxes. A business owner paying $6,000 per year on health insurance must also pay $918.00 in additional self-employment taxes because of this inequality in the tax code, a substantial sum for the smallest of businesses. There is legislation in the House (H.R. 1470) and Senate (S.725) to level the playing field for the self-employed, yet these provisions have not been included nor offered as amendment to the larger health reform bills.
A second item that has been missing in action yet would greatly increase the affordability of health coverage for the self-employed and their employees is the expansion of Health Reimbursement Arrangements (HRAs). HRAs are a flexible benefit option that allows small business owners to reimburse employees tax free for out-of-pocket medical costs, including health insurance premiums. A key benefit of an HRA is that they do not require the business owner to purchase a group health plan. Thus, setting up an HRA can offer some financial assistance to employees of micro-businesses that are unable to afford group health insurance. Additionally, since cost is such a crucial factor for the self-employed, an HRA gives the owner consistency and stability in health benefit costs.
At present, sole proprietors are not eligible to participate in an HRA; an inequity that negatively impacts millions of business owners and employees. Improving Health Reimbursement Arrangements to allow the self-employed business owner to participate in the plan would likely significantly increase the number owners and employees of micro-businesses receiving health benefits and financial assistance with medical costs. Why is this so important to health reform? Due to their size, the self-employed will be exempt from the employer mandate included in health reform legislation. HRAs would be a great way for them to receive and provide to their employees some financial assistance for health care costs.
Regrettably, expansion of Health Reimbursement Arrangements is not on the radar screen of policymakers on the Hill. In fact, we have heard rumblings that Senate Finance may actually want to take away the tax deductibility associated with HRAs in order to help finance their health reform proposal.
Well, it is business as usual here in our nation's capital, where big business and in this case "larger" small businesses gets all the breaks and the self-employed are left paying the bill.