Taking the Plunge…Without Risking Your Neck
Today I ask that you set your entrepreneurial energy aside briefly and consider a critical facet of a consultant’s life: benefits. If you have a health condition, a family or a lackluster retirement savings history—even if you don’t—you shouldn’t walk away from the security of a full-timer’s benefits until you understand the options available to independents.
Medical and Dental
Group insurance plans are only offered to W-2 employees. If you give up your W-2 status, you’re thrust into the complex and often frustrating world of individual plans. Here’s a quick look at how they differ:
- Group: Most companies offer employees the opportunity to buy group medical and dental insurance. Usually the company pays part of the premium, though recent years’ cost increases have often limited this practice. A key advantage to group plans is automatic acceptance: If you’ve been covered by insurance during the past 12 months, you can’t be denied coverage. Also, year-to year cost fluctuations are based on the activity of the entire group, often hundreds or thousands of people. Therefore, increases, while still tough to stomach, tend to be somewhat linear and predictable. Finally, group programs, unlike individual plans, typically include life and disability insurance in addition to health.
- Individual: As you might expect, individual plans vary greatly in terms of cost and coverage. If you’re young and healthy, you may be able to get reasonable insurance for less than what you’d pay for group benefits. But be careful. Take your time comparing plans and read the fine print carefully. Individual plans are often peppered with hidden costs and major coverage exclusions. Annual cost fluctuations also can be much more extreme than even today’s group plans. Think of it like car insurance. One accident or ticket, and you’ll be paying much higher premiums for years. Individual health insurance works the same way for sicknesses and injuries. And of course, if you’re older or have pre-existing conditions, just getting insurance can be a nightmare.
Clearly, group health plans are almost always the safer and more economical choice. But that’s not necessarily bad news for independent workers. Two types of independent work arrangements—working through a staffing company and using an employer-of-record—offer W-2 employment for their individuals. That means you can still take advantage of group benefits programs even while working on your own.
On its surface, an independent’s bold, liberated lifestyle may appear at odds with the discipline of effective retirement savings. But I’ve found that providing for a comfortable future is one of the top reasons why talented professionals go solo in the first place. Look at the options:
- Group: Ah, the good old 401(k). Pick a percentage, pick your funds and sit back as your pre-tax retirement savings grow. Nothing’s easier. While limited by federal caps on how much you can contribute ($44,000 in 2006, or $49,000 if you’re 50 or older), well-designed 401(k)-based programs blend multiple components—profit sharing, employee contributions and employer match—to enable employees to reach these caps with lower earnings than you’d expect. However, even good 401(k) plans feature a limited universe of funds from which to choose, but many companies give employees access to professional financial advisers to help make good investment decisions.
- Individual: The most common type of formal retirement plan for individuals is the SEP IRA. SEPs share the same federal cap as 401(k)s and also are limited to 25 percent of gross income (so you’d need $176,000 in gross income to “max out” your retirement contributions). SEPs are more flexible in terms of investment options, but are more complex to establish. You’ll probably want to get an accountant involved to get started. Also, SEPs require selfdiscipline— you have to consciously make the contributions yourself.
No level of career empowerment is worth putting your health, family or future at risk. Before making the leap into independence, make sure you’ve got the important stuff covered.
Gene Zaino is president and CEO of MyBizOffice Inc., and is the primary force behind a consultant engagement process that provides independent professionals with a “portable” employment and benefits infrastructure, while helping their clients reduce the costs, risks and administration associated with using them. He can be reached at email@example.com.