What to do about health insurance as a solo 1099 federal sub-contractor
As a 1099, you are responsible for paying for your own health care. Many people seem to think health insurance is this extremely mysterious and expensive service that they could never afford on their own.
That’s not true. Health insurance is a product you can buy and it is a pretty straight forward purchasing process as a 1099.
However, your costs can vary dramatically depending on your personal situation. All government contractors have factored in the cost of health insurance into the billable rate they charge the government. You need to do the same for your billable rate as a 1099 sub-contractor.
Health Insurance: Employer Cost vs Individual Market
There are a few reasons why you might be disadvantaged in paying for your own health insurance when you compare it to the rates you pay as an employee:
- Businesses sometimes have access to health insurance plans that the individual doesn’t have access to
- Businesses that are large enough may have enough leverage to negotiate more favorable rates with insurance companies.
For example, I have health insurance through a group plan my company selected. My business partner wanted a great health insurance plan to offer employees. We selected a platinum level plan with CareFirst and our premiums for a 30-year old are approximately $500/month.
At the time we selected this plan (2017 or so), you could buy a comparable platinum level plan as an individual for the same price, so we weren’t getting any deals as a group plan.
When I was researching health insurance prices for this book, I was shocked to find that not only was an individual level platinum plan no longer offered, a lower benefit plan would cost around double what my company is currently paying! I’m not sure why that is. We are probably grandfathered in to certain plan options and due to regulations in price increases, our premiums can only go up so much.
This is all to say that you may not have access to an equivalent quality level health care plan at the same price your employer pays as a 1099, with one exception: COBRA.
COBRA lets you keep your employer’s plan
If your employer offers a health insurance plan, there is a very good chance you will be eligible for COBRA for 18 months. What is COBRA? According to the Department of Labor, “The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires most group health plans to provide a temporary continuation of group health coverage that otherwise might be terminated.”
With few exceptions, if your employer is larger than 20 employees and participates in a group health insurance plan, you have the option to pay for the full cost (and 2% administration fee) of the health insurance plan your employer offered for up to 18 months after you leave the company. I’ll note that my own company had only four employees at its peak (including two owners) and when one of them left, they still had access to COBRA benefits.
If your company was subsidizing your health care premiums, you are going to be paying more. However, this may still be a better deal than purchasing an individual plan on the market. If your company was large enough to negotiate a better deal with insurance companies, you will have access to those special rates. 18 months is plenty of time to figure out health insurance alternatives.
Once you negotiate a 1099 arrangement, you can ask your HR rep about COBRA. The health insurance company will probably send an information packet to your home as well.
Health insurance premiums for the individual market
Since you won’t know the COBRA rate until you leave, the easiest way to estimate what your health insurance costs are going to be is to go to www.ehealthinsurance.com, punch in some basic information, and see what the quotes are for various plans.
Choose a plan that meets your health care requirements and note the monthly premium cost. We’ll call this HCP.
Multiply HCP by the number of months you expect to be working as a 1099 for this first contract.
On an annual basis, if your cost is $600/month, your total cost will be $600 x 12 = $7,200. If the Period-of-Performance (POP) is 6 months, your costs will be $600 x 6 = $3,600.
If you have a family and need health insurance for them, you can input their data too. Generally on the individual market, the rate for a family is just the sum of the premiums for all the individuals on the plan.
You can also perform a Google search for “health insurance broker” for your location and find a professional who will walk you through your options. The plans they will present won’t cost more than if you found them yourself online, the broker will simply get a cut of the monthly premium. You might also have to work through the broker to fill out paperwork rather than just doing everything online. Some people just feel more comfortable talking with a person than an impersonal website which is why I mention the option.
Health insurance through your spouse’s employer
If you are married, your spouse’s employer may offer a subsidized family plan. Ask your spouse to get the current health insurance benefits and rates for his or her company and see if it is better (both in terms of benefits and cost) than your COBRA rate or the individual market rate. There is a good chance it will be.
For a period of time after I got married, I jumped onto my wife’s health care plan, which was excellent. It was only an additional $100/month. Prior to that I was on a catastrophic plan, which is basically a very high deductible plan with almost no covered benefits before the deductible was met. That was something like $250/month.
Even if you and your spouse were on your employer’s plan prior to you quitting to become a 1099, quitting your job is a “qualifying event” and you are permitted to enroll in your spouse’s plan.
Whatever the new cost is, again, just multiply that by the number of months in the contract to get your health care premium costs. If the cost to add you to your spouse’s plan is $200/month, multiply that by 9 months to get $1800.
Other health insurance options: TRICARE, Medicare, etc.
There are a few other health insurance options that you may want to explore if you meet certain qualifications.
For example, if you are a drilling, military reservist, you may qualify for “TRICARE Reserve Select” which is a military funded health insurance program with very reasonable premiums for the coverage. As of the time of this writing, the premium for the individual member is $47.20/month and for a family plan it is $238.99/month. The deductibles are less than $158 and $317 for individual and family plans respectively.
This seems like a bargain if the network meets your requirement and you are willing to continue to be a reservist!
If you are 65 or older, you can qualify for Medicare. Medicare Part B, which is the “health insurance” component, costs $148.50/month. Not a bad deal!
There are a number of health care options that you may qualify for based on certain associations or organizations you have or are currently a part of.
For example, if somehow you became a member of the Screen Actor’s Guild, you can participate in their health insurance plans which start at $375/quarter.
I don’t have any experience with these types of health care options but as a 1099, they are certainly worth exploring.
Factor in deductibles, not just premiums
When I went 1099, I was (and still am) young and healthy. I almost never needed to go to the doctor. Choosing a low-benefit, high deductible plan was worth it for the lower premium. Basically, I chose the certainty of paying lower premiums for the remote possibility of paying a higher amount of health care costs overall (up to my deductible of approximately $6,000).
I don’t remember the exact costs, but I believe the COBRA rate when I left was $500/month for a plan with a fairly low deductible (maybe even no deductible). Annually, I would pay $500 X 12 or $6,000. That was my cap.
However, on the catastrophic plan I chose, my premium was approximately $200/month with a $6,000 deductible. I was definitely on the hook for $200 x 12 = $2400 per year in premiums. If I required a high amount of medical services in a year, the additional amount I would pay would be the maximum deductible, which was $6,000. My total maximum cost would be $8,400 per year.
In a year in which I consumed little to no medical services, I would save $6,000 - $2,400 = $3,600 per year in health insurance premiums.
In a year in which I maxed out my deductible, I would pay an additional $6000 - $8400 = -$2400 per year when compared to COBRA.
When making the comparison between different health insurance plans. you will have to perform a similar analysis. If you consume a large amount of health care services, a lower deductible plan with higher premiums might be the better option financially.
Regardless, for the purpose of planning out your health care costs as a 1099, you’ll need to add the amount you’re going to pay towards your deductible per year and then add that figure to the premium.
Say you choose a plan with a $3,000 deductible. If you know you’ll spend $1,200, divide that by 12 to get a monthly cost ($100). Multiple that by the number of months in the POP $100 x 9 months = $900. Add that to the cost of premiums over that period and you should have your total health care costs (THC) over the POP.
Non-monetary considerations when choosing a plan
This book is not focused on how to choose the best health care plan for yourself or your family. I am only providing enough information for you to get a handle on what your potential costs are going to be. However, I can’t cover every single scenario that would change your overall health care costs when making the move to 1099 so make sure to factor in any additional costs you might incur.
For example, if you have a health issue that requires you to see a certain specialist and the plans you can find on the individual market won’t cover that specialist’s services, that is an additional cost you need to factor in.
I suggest doing some research on the best way to select a health care plan that meets your cost and benefit requirements.
Dental and Vision
I’m not sure dental and vision insurance are really worth it but you can also add those into your THC. Ehealthinsurance.com will have quotes for those as well.
Final number you need: Total Health Care Cost
The number you want to get is your Total Health Care Cost (THC). This is going to be composed of your premium, payments towards deductible, andnon-covered costs. You will ultimately subtract THC from your revenue.
If you have questions feel free to reach out to me directly at email@example.com. I can also add you to my informal mailing list in case I have updates or news or whatever.
This article is an excerpt from Chapter 5 (How to model and compare your potential 1099 income to your W2 compensation) of my book.
You can read more about it here:
Going 1099: How to become a solo federal sub-contractor and gain control of your working life, earn more money and unlock more free time