5 Steps to Create Your Own Self-Employed Benefits Package

Think you have to sacrifice benefits when you leave a traditional job? Laura explains how to create your own benefits package when you're self-employed and answers several related questions from Money Girl readers and podcast listeners. 

Laura Adams, MBA
12-minute read
Episode #533

When you’re self-employed, you get perks that many traditional employees miss: Unlimited vacation and sick days, flex time, tax deductions, and perhaps the ability to work from any location. These are just a few upsides of being your own boss.

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Whether you have a part-time side gig or run a small business full-time, enjoying the entrepreneur lifestyle may be a huge reason you want to work for yourself. But a major downside to all this freedom is not getting a cushy benefits package, which most employers offer.

In this post, you’ll learn how to create your own self-employed benefits program, which is probably easier than you think. Plus, I’ll answer several related questions from Money Girl readers and listeners about working for yourself.

5 Ways to Create Your Own Self-Employed Benefits Package

  1. Buy Individual Health Insurance. 
  2. Use a Health Savings Account (HSA). 
  3. Get a Term Life Insurance Policy. 
  4. Never Forget About Disability Insurance. 
  5. Contribute to a Tax-advantaged Retirement Account.

Here’s what you need to know about these tips to creating benefits that protect your personal finances, cut taxes, and reduce the risk of being an entrepreneur.

1. Buy Individual Health Insurance

If you’ve made the leap from a corporate job to being self-employed, the first benefit you’re likely to miss is health insurance. Group plans cost much less than an individual policy; plus, your employer may have subsidized all or some of your premium.

If you have a spouse or domestic partner with group health benefits, you can become a dependent on his or her policy. But if you’re single or have a partner who’s also self-employed, start shopping.

Remember that not having qualified health insurance is illegal and comes with a tax penalty if you’re uninsured for more than two consecutive months.

If you left a group plan, you’re typically entitled to COBRA coverage. It stands for Consolidated Omnibus Budget Reconciliation Act, which is a law that allows you to continue employer-sponsored health plan for a limited time after you’re no longer employed. It gives you the same medical benefits and choices you had before you left your company, including health, dental, and vision insurance, for up to 18 months in most cases.

Problem is, you’re charged the full cost of COBRA health premiums, which can be much higher than what you previously paid as an employee. So, consider all your options, such as enrolling in a spouse’s plan, a parent’s plan (if you’re younger than age 26), or shopping for an individual plan.  

Remember that not having qualified health insurance is illegal and comes with a tax penalty if you’re uninsured for more than two consecutive months. However, according to recent tax reform, starting in 2019, the penalty for being uninsured, or for having a subpar health plan, won’t be enforced.

Question: An anonymous reader asks, “How do I find affordable health insurance if I decide to leave my job to do freelance work full time?”

Answer: Depending on your income and family size, you may be eligible for a subsidy that reduces the cost of coverage. If you have low income, you may qualify for free or low-cost coverage from Medicaid or the Children’s Health Insurance Program (CHIP). Being eligible for COBRA doesn’t affect your eligibility for any type of federal assistance.

One option to reduce the cost of health insurance is to choose a high-deductible plan. These allow you to make contributions to a health saving account (HSA), which you can spend tax-free on many different qualified medical expenses. I’ll tell you more about HSAs in a moment.

You can purchase health insurance from a variety of places, including:

There’s no denying that health insurance is expensive—but it pales when compared to the potentially massive medical bills you could face after getting into an accident or being diagnosed with a major illness. So, make getting good health coverage a top priority when you’re self-employed.

2. Use a Health Savings Account (HSA)

With many types of insurance policies, a strategy to cut premiums and save money is to raise your deductible. A deductible is the amount you must pay first before your benefits kick in.

When you choose a high-deductible health plan, not only do you pay lower premiums, but you’re also allowed to contribute to a health savings account (HSA).

With health insurance, if you’re in relatively good health, a high-deductible plan can make sense. But the downside is that if you do get sick, you’ll have to pay more out-of-pocket before your payouts for covered claims begin. So, a high-deductive health plan works in your favor when you need limited medical care and aren't likely to spend the full deductible each year. 

When you choose a high-deductible health plan, not only do you pay lower premiums, but you’re also allowed to contribute to a health savings account (HSA). You can have an HSA if you get your qualified plan on the open market as an individual, or through a group plan at work.

Contributions to an HSA are deductible on your tax return, which reduces your tax liability, even if you don’t itemize deductions. Your funds can earn interest or be invested for potential growth. And when you take distributions to pay for qualified medical expenses—such as doctor co-pays, prescriptions, eyeglasses, and supplies—your contributions and earnings are completely tax-free.

You can also use HSA funds for a long list of expenses, even if you don’t have insurance for them, such as going to a dentist, ophthalmologist, chiropractor, or psychologist. But if you spend HSA money on non-qualified medical expenses, the amount will be taxed as income, plus you’re subject to a 20% tax penalty.

However, if you reach age 65 and still have money in an HSA, the penalty doesn’t apply. In other words, if you spend it on non-qualified expenses, like a trip to Hawaii, it would simply be subject to income tax. This makes an HSA an additional retirement account if you own it long enough.

No matter where you get your health insurance, you always own and manage an HSA as an individual. That means you don’t need permission from an employer or the IRS to set one up and it stays with you even if you change jobs or become unemployed.

For 2018, if you have health coverage just for yourself, you can contribute up to $3,450 to an HSA. If you have family coverage, you can contribute up to $6,900.

There’s also a “catch up” policy that allows you to contribute an extra $1,000 to either type of policy, if you’re age 55 or older. You can make contributions at any time, even up to April 15 for the previous tax year, but you’re never required to make contributions.

Question: A podcast listener named Shannon says, “I really learn a lot from you. What are the top places to open a HSA account?”

Answer: If you qualify for an HSA, it’s easy to open one up at institutions such as Lively HSA and HSA Bank.

See also: HSA Rules After Leaving a High-Deductible Health Plan


About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.