How portable benefits can drive US innovation and job growth

Washington policymakers are looking to modernize labor laws, and some Democrats and Republicans are finding common ground. Members of both parties agree on the need to support the surging self-employed workforce through portable benefits — those tied to an individual rather than to his or her employer.

Indeed, two weeks ago, Rep. Kevin Kiley (R-Calif.) introduced a bill legalizing the flow of benefits to all workers, even those outside of traditional, W-2 employment arrangements. Republicans including Senate Health, Education, Labor and Pensions Chairman Bill Cassidy (R-La.) and Democrats including Sen. Mark Warner (D-Va.) and Rep. Suzan DelBene (D-Wash.) have offered support for similar ideas.

Although the primary aim is to help freelancers and gig workers, portable benefits have surprising potential to bolster entrepreneurship and thus the U.S. economy.

From brick-and-mortar small businesses to high-growth tech startups, entrepreneurs drive job creation, economic dynamism, and technological progress. Yet with benefits in our country largely tied to W-2 employment, for many aspiring founders, launching a company can mean losing essential benefits such as health care.

When promising entrepreneurs are discouraged from pursuing their ventures — choosing instead to remain in traditional employment where benefits provide a crucial layer of financial security — the rest of us lose out on future job opportunities, products that make us better off, or other helpful economic activities.

This challenge disproportionately affects potential entrepreneurs who already face systemic barriers such as limited assets, student loan debt or caregiving responsibilities. A single parent considering starting a business may hesitate to leave a steady job if it means losing employer-sponsored health insurance that covers a child’s medical needs.

This is often called “entrepreneurship lock” — a situation in which workers would pursue entrepreneurship but for their reliance on employer-provided benefits, particularly health insurance.

Indeed, one study found that workers who receive health insurance through their employers, especially those without access to a spouse’s benefits, are significantly less likely to leave their jobs to start a company. The authors conclude that America’s fixation on employer-provided health insurance at the expense of other models is a barrier to business creation.

A nationally representative survey conducted in the summer of 2020 reinforces this point. Among those who seriously considered starting a business but ultimately did not, 20 percent cited the need for employer-provided health insurance as a key factor.

Additionally, a series of Kauffman Center and Engine roundtable interviews with entrepreneurs indicated that access to health care and other benefits is a particular concern for women, people of color and other underrepresented founders, dissuading some from leaving steady employment to found new ventures.

Portable benefits offer a practical solution because they follow individuals as they move between jobs and ventures.

The first step toward portable benefits is legalizing access to benefits for self-employed workers simply by stating that no federal agency can use the presence of benefits to determine whether a worker is considered “self-employed” or an “employee.” This is what Kiley’s bill would do.

Next, policymakers should give self-employed workers the same tax advantages as traditional employees, including the ability to establish “cafeteria” plans similar to those permitted under Section 125 of the tax code.

This would allow entrepreneurs to deduct contributions to flexible benefits accounts from their self-employment taxes, a privilege similar to the one currently limited to W-2 employees (based on how payroll taxes are levied). These funds could be used for key expenses such as retirement savings, health care, life and disability insurance, childcare and more, ensuring greater financial security for would-be entrepreneurs.

Finally, Congress could make several changes to health care-related benefits to increase access for entrepreneurs, such as relaxing restrictions on Health Savings Accounts (HSAs). As just one example of these restrictions, currently, HSA funds cannot be used to pay health insurance premiums except under specific conditions like unemployment.

Allowing premium payments under a wider range of conditions would provide significant financial relief to entrepreneurs who lack employer-sponsored plans. Allowing HSA contributions to be tax-exempt for both federal income taxes and self-employment taxes — another advantage currently limited to traditional, W-2 workers via payroll taxes — would make these reforms even more powerful.

The bipartisan push for portable benefits presents a unique opportunity to support independent workers and fuel U.S. entrepreneurship. By breaking “entrepreneurship lock,” these reforms can remove barriers to business formation and spur job growth — a positive twist that would lead to more Americans founding their own businesses.

Liya Palagashvili is a senior research fellow with the Mercatus Center at George Mason University and author of “Flexible Benefits for a Flexible Workforce” and co-author (with Jonathan Wolfson) of “Flexible and Portable Benefits for Independent Workers: Federal Policy Guide.”

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