April 02, 2019

Insurance and Retirement Planning for Solos

Michael Broad


This article gives an overview of steps that you as a solo or small firm practitioner can take to protect and enhance your professional and personal life. For convenience, the article is divided into four areas—yourself, your assets, your business, and your future—although, of course, there is considerable overlap. The focus is on types of insurance coverage you should consider (and some operational strategies that can reduce potential exposure and thus decrease the need for certain business insurance) as well as various options for using retirement accounts.


Protecting Yourself

Health insurance. Sole practitioners often arrange to be carried on a spouse’s policy, and sometimes a staff person with an employed spouse can do the same, but firms with more employees generally need to make some kind of health insurance available to staff. The employer can decide what portion of the premiums (if any) to pay on behalf of employees. Be prepared to reassess your policies: Costs and coverage are likely to shift around over the next few years as health care reform phases in.

Health care reform tax credit. One change from health care reform is a new tax credit for small employers. To qualify, a firm must have fewer than 25 “full-time equivalent employees” (FTEs), with average wages under $50,000 a year, and the firm must cover at least 50 percent of the employees’ health insurance premiums. There are some other restrictions, and the size of the credit varies. Through 2013, the credit will cover up to 35 percent of a firm’s expenditures for health insurance premiums. In 2014 that credit increases to as much as 50 percent of premiums paid.

Long-term disability insurance. Many solos and small firms skip this coverage because it’s expensive. But that leaves at risk your most important asset: your personal productive capacity and earning power. As a group, lawyers are pretty safe (we rarely have workplace injuries), so it’s a good idea to look for disability coverage offered through the bar association or other lawyers’ affiliate groups and targeted specifically for lawyers. Save money by taking a longer waiting period and self-insuring for the first 90 or 120 days rather than 30 or 60. If you pay the premiums with after-tax dollars, insurance payments will be tax free.

Long-term care insurance. Long-term care (LTC) insurance is particularly well suited for people of medium wealth who want to leave an inheritance and therefore don’t want all their savings exposed to nursing home costs. People with fewer assets who need nursing home care are likely to qualify for Medicaid, while people with substantial resources can probably pay out of pocket. Today’s LTC insurance policies also pay for in-home services and can therefore help people stay in their own home and avoid or delay the need to go to a nursing home.

Other. There are a number of other new tax breaks for small businesses (such as faster depreciation and expensing of capital items) that are too detailed to discuss here. Ask your tax accountant if any of them might apply to you.


Protecting Your Assets

Additional liability insurance/umbrella insurance. Many people are drastically underinsured against liability claims. Lawyers are commonly perceived as having “deep pockets” and therefore make attractive defendants. In most states, the minimum permissible automobile liability insurance is outdated and inadequate. For example, you may only need $20,000 liability coverage for injury or death, although actual liability can run into the hundreds of thousands or even millions. If you carry only the statutory minimum, then in effect you are self-insuring for the real exposure. Buy more basic coverage, and talk to your insurance agent about adding an “umbrella” policy over your homeowners and auto policies. The umbrella will pay if the underlying coverage is exhausted. An extra million or two of coverage doesn’t cost much, but it could protect your savings and your house.

Homestead protection. Another way of protecting your house, quite literally, is by taking advantage of state law homestead protection. Federal bankruptcy law includes a homestead exemption that looks to state law for the amount of home equity that can be protected in a bankruptcy under Chapter 7. Some states give the homestead automatically; others require that the homeowner files a declaration of homestead.

Premises insurance. Be sure to tell your insurance agent if you work from home. This may be covered as an “incidental business use” or may require special coverage. Regardless, you don’t want to be exposed if a client slips and falls on your premises.

Malpractice insurance. Even if malpractice insurance is not mandatory in your state, going “bare” is risky. Your coverage should include any specialty areas of your practice (title agent, SEC, public company representation). If you’re on any boards (for-profit or nonprofit), get coverage under your own malpractice policy unless you are sure the entity has adequate protection for its board members. Remember to get tail coverage when you (or your partners or employees) stop practicing. Make sure all the professionals in your practice are covered. Have enough coverage (per claim and aggregate). Pick an appropriate deductible: You can save a lot on premiums if you take a higher deductible, and that may make it easier for you to resolve smaller issues without bringing in your carrier. But don’t take on more deductible exposure than you can afford to cover if there is a claim. Many policies now cover proceedings at the state licensing agency if a complaint is filed there.

Asset protection strategies. Some professionals put everything in their spouse’s name or stash money in jurisdictions that give creditor protection to self-settled trusts. This is usually unnecessary if you have enough insurance.


Protecting Your Business

Talk to your insurance broker about the following, more specialized coverages. Depending on your practice situation, some may not be worth the cost, while others may be valuable to have.

Data security and privacy liability. More and more businesses have had some experience with accidental disclosure of confidential data or intentional breach of security. Some carriers now offer “cyber-protection” insurance against liability for privacy exposures, including identity theft, that could arise from breaches of security and that would not be covered under a conventional business policy. As a practical consideration, however, remember that your best “insurance” against a security breach is a strong, functioning set of data security protocols. Have procedures to maintain security and to deal with any breaches (e.g., use encryption and change passwords and premises entry codes periodically and when you change personnel). Stay current on state and federal requirements, which may include mandatory notification of clients if their data is compromised.

Employment practices liability insurance. If your practice is large enough to be governed by federal or state employment discrimination laws, you might consider this type of insurance, which covers claims of discrimination and harassment by job applicants and by current and former employees.

Fidelity bond. This type of coverage is also known as “honesty insurance.” Some practices have a few key, trusted employees who have access to client funds or to assets belonging to the firm. A fidelity bond may be used to insure against employee dishonesty, including outright theft, misappropriation, embezzlement, etc.

Business interruption insurance. Your lease may require you to carry this insurance. If your office burns down or gets flooded, business interruption insurance will give you some money to pay the rent and perhaps to cover operations and payroll as well while things are down. As a practical consideration, bear in mind that your clients’ legal needs aren’t going to stop just because your work site is out of commission, and you certainly don’t want your clients to go to another lawyer in this situation. Develop a disaster plan that lets you function from a remote location as seamlessly as possible. (This will be easier if you’ve taken the leap and gone to a paperless or limited-paper office, as you could continue practicing from temporary workstations.) Consider teaming up with another, similar-sized firm in a different location, so the functioning firm could temporarily host the disrupted firm. And remember: A paper plan isn’t worth much until it’s been field tested.

Technology insurance. Most of the extended warranties offered on technology purchases aren’t worth the extra money. A possible exception is for portable devices, such as laptops, which often seem to have a short life span. A more important consideration is the speed and thoroughness of repairs when you have technology problems. If you can’t operate, maintain, and fix your system yourself, you need someone on call who will recognize you as a priority client. (Even if you’re a tech wiz, who is going to step in if you’re at trial or handling a merger or on vacation?) Buying an extended warranty on your system may give you faster attention and a higher level of service from the vendor, but often better and cheaper service is available through independent technicians. Consider finding someone local or someone who can diagnose and fix your computer problem over the Internet. You might pay some up-front money for a couple hours of consultation to establish a relationship or put your outside wiz on retainer. Have an appropriate confidentiality agreement and have password protection or encryption on confidential client data files. Independent techs go into a lot of local businesses and homes and can sometimes be a great source of legal referrals.

Payroll company. You should confirm periodically that your payroll service is actually remitting payroll taxes and other deductions (such as for retirement plan contributions). If the payroll company defrauds you and your employees, you’ll be the one who ends up liable when the company goes out of business.


Protecting Your Future

Retirement plan contributions. This could be an entire article itself. If you do corporate or employee benefits work, you might want to know more of the details; if not, ask your accountant for advice. The simplest retirement plan is a traditional individual retirement account (IRA)—it’s set up by the individual without involvement or funding from the employer. You control the amount and timing of your contribution and decide where you want the account to be held and how you want it to be invested. The main drawback is the contribution limit of $5,000 a year ($6,000 if you’re 50 or older).

A simplified employee pension IRA (SEP IRA) has a higher limit—20 percent of your net self-employment income up to $49,000—but you have to make contributions for your eligible employees.

With a 401(k), employees can elect deferral of salary up to $16,500 ($22,000 if age 50 or older), and the employer can make contributions up to $49,000 ($54,500 for age 50 or older). The employer’s deduction is limited to 25 percent of the total wages of all employees. A 401(k) must not be top-heavy, meaning the employer can’t discriminate against less-compensated employees in funding the plan. The 401(k) has more compliance and filing requirements than the IRAs.

A sole proprietor with no other employees can have a 401(k) and can make contributions both as employee and as employer. With only one participant, there is no issue of being top-heavy. Also, if you have less than $250,000 in assets in your solo 401(k), you’re excused from completing the 401(k) compliance forms.

If you want to make larger contributions (particularly if you’re in your high-earning years and have neglected retirement savings in prior years), consider establishing a defined benefit plan. Employers can contribute up to $195,000 a year per employee. But you need an actuary to determine the actual amount that can be contributed (based on predicted benefits to the employee in retirement), which adds to the cost of the plan. And there’s less flexibility, because you have to make contributions annually for several years.

Personal financial plan and investment plan. This one is for you and your family no matter what size firm you work in. Funding a retirement account takes a certain amount of discipline. Over time, even modest annual retirement contributions can grow to substantial size, thanks to the miracle of compound interest. Don’t be one of the lawyers who spends 2,500 hours a year generating billings and only one or two hours thinking about these retirement accounts.

Unless you’re in your first years of practice, when income and expenses are often very fluid, you should have two personal plans. First, a financial plan that basically lets you figure out whether you’re on the right track. This plan answers the question: “if you keep doing what you’re doing, are you going to end up where you want to be when it’s time to retire.” If the answer is “yes,” great; if it’s “no,” then figure out what you can change to get to “yes.”

Finally, you should have an investment plan that lays out your financial needs (when do you need money for college? for retirement?) and determines an investment structure that is consistent with these needs. The investment plan implements the financial plan. For example, if you’re going to be paying college tuition in five years or less, that money should be in something safe and not in the stock market. Investing isn’t about hot stocks and quick money—it’s about the systematic application of money over time in a way that creates a viable portfolio tailored to your personal financial needs. If you can’t do this yourself, talk to a financial planner!

Consider transitions, exit strategy. If you’re within five to seven years of retirement, you should be thinking about what will happen when you’re ready to retire. Who will take over your practice and provide continuity for your clients? Will you be able to realize any value from your practice when you retire, or will the practice just vanish? Often small practices have to create the vehicle for their own succession plan, such as by finding another firm to merge into or by hiring other lawyers who want to take over firm management. All of this takes time to arrange, so plan ahead!

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