15 Mar 2014

A Reader Email Re: Gaming ObamaCare

Health Legislation 8 Comments

I am not endorsing the following, but a reader sent it and I thought I should at least pass it along to all of you (he gave me permission to reprint):

Here’s a thought for you or an Austrian colleague I’ve never seen printed that you may consider. “ACA will cause more startup companies and independent contractors”. For 15 years I’ve flipflopped between being an employee and an IC with an LLC and S Corp tax election. My wife is a homemaker and I am fat, meaning that prior to ACA I either needed to have employer-paid healthcare or cobra, otherwise I would have no insurance. No insurance company would give me coverage at any cost. So basically I could only milk the independent consulting cow for 18 mos at a time before going back to FTE.

As of November I went to permanent IC because I now had ACA to provide me with cheap healthcare forever.

And the rest of the taxpayers are footing the bill. Let me explain. My ACA policy is less than half the price of cobra and the policy is better. Ah, but it gets better due to tax laws and S Corp arrangements. VERY quick summary…as an employee your employer-paid healthcare premiums are added to your wages but are free of FICA. Pretty basic math. As an S Corp “employee” the same applies, but an S Corp employee must only have a salary that is about 1/2 of total consulting net income from the S Corp…and healthcare premiums apply to the “reasonable salary” test. So, without divulging what I make, as a contractor my salary, when including premiums is less than one THIRD of what it would be if I were an employee making a comparable salary. For ACA, the difference in premiums for someone making say 70K vs 100K in wages is staggering. Who’s subsidizing that? The taxpayer is subsidizing the “wealthy” since it is the wealthy that are the IC’s and not the poor who tend to b e employees.

In my case my hourly rate is about 1/2000th of what my salary was. My employer and I worked this out (50 weeksx40 hours). Yet they no longer have to pay 401K match, various premiums, employer FICA and unemployment, and various incidentals. And yet I’ll still “take home” more money. When I ran the numbers for my employer we came to this agreement. They were so thrilled they did bump my hourly rate as a courtesy.

Ah, but it gets better. If instead of getting “individual” ACA I had my S Corp get SHOP healthcare via healthcare.gov I would’ve gotten an additional 25% discount since I am a small business. The only reason I didn’t do it is because, well, I only realized that was an option after I already signed up for individual. And I swear there was a healthcare.gov “glitch” (I of course never heard of any other bugs with that site) where I could not cancel one and apply for the other.

Ah, but it gets better. There is debate right now as to whether this is still valid/legal under ACA, but I know LOTS of people doing it regardless, until informed by the IRS to cease. And that is your S Corp creates an HRA for you. With an unlimited HRA (costs about $170/yr to setup/administer) your business can fully deduct any and all medical-related out-of-pocket expenses with no cap. Anything from band-aids to out-of-pocket ACA deductibles. How many employees have this option at their company? This makes ANY healthcare expense a top line expense vs a bottom line deduction subject to 1040 itemization rules.

My points in all this…a)ACA will clearly benefit the “wealthy”/smart that can manipulate the system to their benefit. It’s insane that I can do this. b)more people like me (experienced, advance IT architect) will opt for independent consulting vs FTE. I was not the only person who moved to IC in November. Lots of people where I work did too. And companies often prefer ICs over FTEs because it makes their labor force more elastic. This could eventually lead to so many people converting to ICs that the entire withholding tax system comes tumbling down.

In case you aren’t familiar with the effective tax savings of an IC with an S Corp arrangement…my effective tax rate will likely be LOWER this year than Mitt Romney’s when he got into all kinds of trouble for his “carried interest” arrangements a few years back. And I don’t even use my show horse as a business expense.

I have NEVER seen a non-Austrian state that ACA was really a way for the crony capitalists to further bilk the system. I beg to differ with those who state the wealthy are subsidizing the poor. It’s more like the middle class is subsidizing everyone else.

8 Responses to “A Reader Email Re: Gaming ObamaCare”

  1. Major_Freedom says:

    “Clearly we need even more regulations to solve the problems created by the ACA regulation.” – Mr. Progressive.

    Small government works people! Except when it always and inevitably turns into big government.

  2. Tel says:

    I beg to differ with those who state the wealthy are subsidizing the poor. It’s more like the middle class is subsidizing everyone else.

    I doubt the middle class will fall for it, they are already under strain and probably most will just keep paying the extra tax until the whole thing topples over.

    Hey, speaking of the health system collapsing… is it legitimate for Austrian economics to make any statement about a system collapsing? I mean, individuals might have preferences, and clearly the individual writing the email feels that he stands to gain, while other individuals have stated they stand to lose. But systemic collapse requires a universal utility that is being depleted, and where does this come from?

    The most that Austrians can say is the system shifted from one state to another state, some people lost and others gained. It’s not possible to say whether this was an overall improvement or not.

    • andrew' says:

      All the claims were…breaks from reality shall we say.

      I don’t know why other theorists would surrender reality to Austrians but sometimes it seems they do.

      So a gap between marketing success based on wishful thinking and real constraints sounds a lot like a bubble ( including the borrowed money) and something Austrians could speak on.

    • Matt M (Dude Where's My Freedom) says:

      “I doubt the middle class will fall for it”

      Are you kidding? They ALWAYS fall for it. The middle class subsidizing everyone else is basically the story of EVERY stupid government program since 1900. And not only do they keep falling for it, they keep demanding MORE of it!

  3. Benjamin Cole says:

    I like Mr. Fat. When I started a small business, I was pleasantly surprised how everything was deductible. Cars, phones, health care, rooms in the house, computers, lunches, trips…you name it

    • Gamble says:

      Yo Benjamin,

      The only items deductible are legitimate business expenses. So any room in your house must be used exclusively for business, any car miles must be business miles, etc.

      Of course real business expenses are deductible, they detract from income/profit.

  4. Gamble says:

    The author of email refers to independent contractors as wealthy because what, they make 70k geesh…

    The S corp independent contractor setup is not that big of a deal. You have to pay income tax as an IC and your scorp has to pay corporate income tax I have studied the ins and outs and the fact you have to have board with real members is usually not worth any tax savings. Some people insist scorps pay executive draws but the receiver must pay income tax.

    Regarding all the insurance savings and double dipping, etc, the email author is simply wrong because there are income limitations to the various breaks. He said he is receiving big time income, then this exceeds the average employee wage limit of 50K, etc.

    Two things.

    1. You are fat, so all the health insurance payers are subsidizing your glutinous life style,
    2. When you honestly appraise tax code, THERE ARE NO BREAKS! Tax accountants are a bunch of phreaking liars. The IRS is not stupid, the want what they want. They don’t give away money.

    I have noticed a disturbing trend. Many Republicans and Democrats are self deceived, They happily march to the ballot box, pull the lever, smile, and tell themselves they have the system beat. They think, hey so what if Joe Blow Politicians raises taxes, I am not paying any, legally. Lies. There is no escaping the taxman. Even offshore accounts are highly regulated, if not regulated the most. The only tax breaks are lies. You may defer taxes but ultimately, taxes always come due. Take your gross, minus expenses and legal deductions. This is your net taxable income. Look up tax table, this is your tax liability. Subtract any taxes paid in during year, remainder is amount due. The only way to escape is to lie and evade. Sorry Charlie, the IRS is a ruthless SOB.

  5. Scott D says:

    No, he’s not making 70k. That’s how much a FT salaried programmer with 3-4 years of experience should be making. He’s an IT architect working as a contractor. 150-200k annually, maybe more.

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