The Freelancer's Guide to Building Your Own Benefits Package
Do you have “gigs” rather than a job? Would you describe yourself as a freelancer, an independent contractor, or self-employed?
For roughly 41 million Americans this year, the answer to at least one of these questions is yes, according to research from MBO Partners. They make up one-third of all workers in the U.S., working for themselves rather than for a traditional employer. And by 2020, their ranks are expected to swell to 40 percent of all workers over 21 years old.
Research finds that members of this “Gig Economy” are generally happier and healthier than those who are traditionally employed. But if you count yourself among them, you probably lack the traditional safety net we refer to as employee benefits — things like an employer-subsidized health insurance plan, a retirement plan, worker’s comp insurance, and the like. And that lack of benefits can have financial consequences. One in three independent workers surveyed by MBO say planning for retirement is a challenge, and 40 percent expressed concern over their benefits — healthcare in particular.
The solution — whether or not you expect to remain as an independent worker long-term — is to find a way to cobble together your own portfolio of benefits.
Here’s what you need to do:
Start With Health
Granted, right now, healthcare is a bit of a question mark. But that doesn’t mean you should punt on buying coverage for today and the near future. Every year, more bankruptcies are caused by unreimbursed medical emergencies than any other factor. You’re better off buying coverage for right now — even if it only lasts a year or so — than dealing with the healthcare landscape of tomorrow.
That’s why securing health insurance should be your first priority, says Noah Lang, CEO of Stride Health, a healthcare portal that matches independent workers – including on platforms like Uber and Etsy – with the most cost-effective plans for them. “If you have nothing else, but you have [health insurance], at least you’re covered for the biggest risk in your life,” he says.
As this article is published, we are not in the Open Enrollment period — the time during the calendar year when anyone can sign up for a new health plan via the healthcare exchanges that emerged from the Affordable Care Act (employers have their own open enrollment period). You can sign up for coverage if you have a qualifying event—losing coverage, getting married or divorced, and having a baby all qualify. But otherwise, you’ll have to wait until the fall; last year's open enrollment period started Nov.
1 and lasted six weeks, and you can probably expect a similar schedule this year.
In general, buying a plan means picking a place to shop. You can go through the exchanges themselves via healthcare.gov, or you can opt for a system that offers some guidance. Stridehealth.com is one option. Freelancersunion.org is another. (And if you’re earning closer to six figures, you may also want to look at MBOpartners.com, which goes beyond just healthcare benefits to help with everything from incorporation and managing your back office needs.)
Then, you have to pick a type of plan to buy. Your options:
A PPO, which doesn’t limit you to in-network healthcare providers (or make you get referrals for specialists), but will charge you higher out-of-pocket costs for out-of-network providers
An HMO, which typically limits coverage of medical services to in-network healthcare providers with whom they contract
A high-deductible health plan with a Health Savings Account, in which you pay for most of your appointments and prescriptions until you meet your deductible, and use the tax-advantaged HSA to help defray the costs.
How do you make the call? If you’re generally healthy (and not planning on getting pregnant anytime soon), buying the high deductible plan is likely the way to go. If you have a chronic condition (and like the doctors you see for it), buying the pricier PPO or HMO that covers more of your costs is often the smarter move. And note: If you’re an independent contractor set up as a C corporation, an HRA – a Health Reimbursement Accounts, which allow you to contribute significantly more than HSAs – can be an even better way to go, says Gene Zaino, CEO of MBO Partners.
Then, Insure Income Risk
You’d think retirement would be next on the list. “It’s often the second most desired, but not the second most important,” says Lang. “The bigger risk is that you can’t show up for work, because you’re ill or injured — or you can’t pay a bill.” You can insure against this possibility by making sure you have at least a few thousand socked away in emergency savings. Considering that just 42 percent of Americans have enough cash in checking or savings to cover a $400 emergency (according to the Federal Reserve), that’s an area in which many people could use some work.
One way to boost those savings is to automatically transfer a percentage of your earnings into savings. You can set up an automatic weekly or monthly transfers with your bank, but if you’re paid on an irregular schedule this may lead to problems with overdrafts. It may be easier to save as you get paid. An app like Tip Yourself makes this easy if you can use getting paid as a trigger to get yourself to transfer the funds. Or, you can try Digit, an app that figures out how much you can afford to save based on your spending, and the balance in your accounts, then moves the money automatically.
Finally, Deal With Retirement
As for retirement, even if you decide to go back to work for a traditional employer, that $5,500 Roth IRA contribution you made this year could easily be worth $60,000 in 2047. Maybe more.
You don’t need a full-time job to fund a retirement account, and freelancers’ options are many. An IRA or Roth IRA both allow you to contribute up to $5,500 a year (or $6,500 if you’re 50 or over), and SEP IRA (designed specifically for self-employed people) allows you to put away up to 25 percent of your income, capped at $54,000 a year.
But Lang suggests funding a Health Savings Account first. His logic is sound. The $3,460 you can contribute for an individual, or $6,900 for a family, is—like traditional or SEP IRA contributions—tax-deductible. The money can be invested to grow tax-deferred. Then, in retirement, you can use it for anything (not just medical expenses) by paying income taxes on the withdrawals. But unlike IRAs, you can use the money tax-free for healthcare needs whenever. If you don’t have an HSA—or after you’ve funded one—then move onto the menu of IRAs.
And just as a traditional employee can set up their 401(k) to automatically deduct from every paycheck, so too can you find a way to set and forget regular contributions to your retirement account.