A Simple Guide to Self-Employed Retirement Plans and Insurance

Myles Ma of Policygenius explains how to build your own benefits package, including health insurance for small business owners.

Myles Ma By Myles Ma

Solo entrepreneurs need to think about self-employed retirement plans and health insurance, on top of running a business. (Credit: Upsplash)

Solo entrepreneurs need to think about self-employed retirement plans and health insurance, on top of running a small business. (Credit: Upsplash)

People love payday. Higher wages are the top reason people say they would leave a job. But employee benefits are up there too.

Half of the people who responded to a recent survey by Yoh, a staffing company, said they would change jobs for the promise of better benefits, the second-most popular reason behind higher wages. And why not? Good companies give you a lot more than pay. They help you save for retirement, provide health and disability insurance for when you’re sick and usually offer some life insurance too.

But what if you’ve decided to strike out on your own? How can an entrepreneur build her own benefits package without the help of a corporate human resources department? We’ve put together this guide to help.

Retirement

Self-employed people have plenty of options for saving for retirement and getting a tax advantage at the same time. Here’s a rundown of three common options:

[Related: Read about how many women are ill-prepared for retirement]

1. Simplified Employee Pension

A SEP plan allows you set aside retirement money for yourself without start-up and operating costs. You can contribute up to 25% of your earnings. SEP plans are easy to set up, cost little to manage and allow for flexible contributions.

Establishing an SEP requires you to fill out IRS form 5305-SEP. It’s only a page long and must include the name of the employer (your name or your business’ name), requirements for participation in the plan, a signature and instructions for how funds are allocated. Then you open an SEP individual retirement account with a bank or other financial institution.

2. 401(k)

That’s right, you too, can get a 401(k). A 401(k) with only one participant is sometimes called, according to the IRS, a Solo 401(k), or a Solo-k, or a Uni-k, or a One-participant k. As an independent person, you can call it whatever you want.

Whatever it’s called, a 401(k) for one has the same rules and requirements as any other 401(k) plan. Like any employee, you can contribute up to $18,500 a year, plus an additional $6,000 if you’re 50 or older. Self-employed people can contribute up to an additional 25% of their earnings or up to $55,000.

3. Individual Retirement Account

You can enroll in a traditional or Roth IRA, but people who own a business have the option of opening a Savings Incentive Match Plan for Employees (SIMPLE). A SIMPLE IRA lets you defer up to $12,500 of your earnings each year, plus $3,000 more if you’re 50 or older.

Employers running SIMPLE plans also have to contribute on behalf of their employees: Either matching contributions up to 3% of their salary or a flat 2% of salary, regardless of how much the employee contributes. Since you’re both employer and employee, you use your earnings instead of salary to make the calculation.

This is a complicated choice. I asked Patrick Hanzel, a senior associate for advanced planning at my company, Policygenius, about the best course.

“We suggest they talk with their accountant to determine the best fit because it completely depends on what they show for income,” he said.

IRAs, SIMPLE IRAs and solo 401(k)s can all be opened through a financial institution.

Health insurance

You may have heard, but there’s a place you can buy individual health insurance through the government. Established by former President Barack Obama’s health care law, the state and federal marketplaces for health insurance are probably your safest bet for comprehensive health coverage. You may experience sticker shock at premiums, but depending on your income, you may qualify for tax credits that will reduce the price, as 83% of consumers did this year.

Even with that discount, a group plan is usually cheaper, so before checking the individual market, see if your spouse can add you to their health insurance.

Of course, if you’re reading this outside the open enrollment period, you have missed the deadline to sign up for individual insurance anyway. You may qualify for a special enrollment period if you got married or divorced, had a baby, moved or lost health coverage, but if not, you can learn about your other options here.

You should know: Most plans on the exchange don’t come with dental or vision coverage. Check out our guides to paying for dental and vision care to figure out your options.

[Related: Young Entrepreneurs in the Age of Obamacare]

Disability insurance

Business owners have a specific type of insurance to help them to protect company assets. It’s called business overhead expense disability insurance. It pays for things like business rent, utilities, accounting fees and other overhead expenses in case a business owner becomes too ill or disabled to run their business. But you should also consider an individual policy to protect your own income.

The two major types of disability insurance are short-term and long-term. You may not need short-term disability insurance, which can last up to a year, if you have enough savings. Hanzel suggested making long-term disability insurance a priority.

“Short-term is pretty pricy in relation to the potential benefit received, so three to six months of emergency savings is recommended with a long-term policy to help with any catastrophic disability,” he said.

Illness or injury can have long-lasting effects on your earnings, but long-term disability insurance to protect against income loss can be expensive and complicated.

Two options to look out for: Own occupation coverage, which pays a benefit if you can no longer work in your field, and a future increase option, which allows you to increase your benefit without medical underwriting in case your business takes off and your income increases.

Self-employed people should definitely have a residual disability benefit, which allows claims if they income goes down due to fewer hours worked or a reduced ability to do the same work as before an injury.

One more thing: Unlike a group disability plan for which your employer pays the premiums, you won’t pay tax if you receive a benefit. Because you are paying the premiums, and paying taxes on those premiums, you get the benefit on individual disability insurance tax-free.

Life insurance

Even people who work regular jobs buy life insurance on their own. (In fact, they should since even the best employer-sponsored life insurance plans don’t offer adequate coverage.)

But calculating how much life insurance to buy is a little trickier when you own your own business.

Normally you’ll want enough of a benefit to cover any unpaid debt, the costs of supporting any dependents, end-of-life expenses and any other financial cushion you want to give your family for necessities, less any assets you expect to leave behind.

But, depending on the legal structure of your business, you may be personally liable for any business debts you incur in addition to anything you may owe personally. Many self-employed people organize their businesses as sole proprieterships, which essentially treat the business, and its debts, and the owner as one and the same (talk to your lawyer about the best way to set up your business). If you went into debt to start your business, you should make sure your death benefit is large enough to cover those liabilities so they don’t eat into the size of your estate.

You should have enough coverage to also provide a replacement income stream for your family, Hanzel said.

“If the family isn’t involved in the business, then they might have to sell [the business] quickly and at a discount after death if there isn’t insurance to pay for expenses,” Hanzel said.

Recommended Reading

Here are some more resources to help self-employed workers score their own benefits package.

This article originally appeared on Policygenius

Posted: October 8, 2018

Myles MaA Simple Guide to Self-Employed Retirement Plans and Insurance