[What You Need to Know to Stay Safe] Supposedly “Legal,” but Your License Could Be Revoked… The Reality of Social Insurance Schemes Targeting Self-Employed Individuals and the Penalties Involved

Introduction: Is That “Great Deal” on Social Insurance Really Safe?

“National Health Insurance (NHI) is too expensive, so I want to enroll in Social Insurance to keep my premiums down.”

“I want to try out the ‘secret trick to legally opt out of National Health Insurance’ that I saw on social media.”

Among sole proprietors and freelancers, schemes that tout “tax savings (cost savings) through enrollment in social insurance (health insurance and employee pension)” are gaining attention.
Because they appear attractive and legitimate at first glance, there is no end to the number of people considering adopting them.

However, there has been a sharp increase in cases where individuals receive notices of “revocation of eligibility (retroactive revocation)” following reviews or investigations by pension offices and other agencies, resulting in the imposition of massive penalties.

In this article, we’ll explain the inner workings of so-called “National Health Insurance evasion schemes,” why eligibility may be revoked, what penalties may apply, and the proper steps self-employed individuals can take to protect themselves.

What exactly is a “National Health Insurance evasion scheme”?

A “National Health Insurance evasion scheme” refers to a method used by self-employed individuals—who would normally be required to enroll in the National Health Insurance program—to reduce their social insurance premium burden by making it appear, in name only, as though they belong to a corporation or business establishment in order to enroll in the social insurance system.

Common and Typical Scams

• Registration as a Nominal Corporate Officer: Registering as a nominal officer of an
  acquaintance’s company or a shell company, and calculating and paying social insurance premiums based on a low officer’s salary.
• They enter into contracts for outsourced work or employment
  that exist in name only, posing as employees or part-time officers to qualify for social insurance coverage.
• Falsely Claiming a Joint Venture: Several people set up a business with no
  actual operations and register it as a business subject to social insurance.

These methods are often advertised as “completely legal” by “tax-saving consultants” and in social media promotions, and there are a notable number of cases where people sign contracts without fully understanding the risks involved.

Why does something that appears “legal” result in the revocation of a license?

When it comes to eligibility criteria for social insurance, what is considered most important is “substance,” not “form.”

Even if the legal documents (such as registration records and contracts) are in order, if there is no actual work performed or wages paid, the application will be deemed ineligible following an investigation by public agencies (such as the Pension Office or the Japan Pension Service).

Typical Scenarios That Directly Lead to License Revocation

1. Not engaged in any actual business operations (merely a nominal entity)
2. There is a discrepancy between the actual nature of the work and the compensation (such as extremely low pay rates)
3. My primary occupation is as a sole proprietor, and I do not have a corporate entity.
4. They are using a corporation (a shell company) established solely for the purpose of enrolling in social insurance.

If, during the Pension Office’s regular determination, ad hoc adjustment, or individual investigation, it is determined that the circumstances do not exist, eligibility for social insurance will be retroactively deemed invalid (cancellation of eligibility).

The “Three Terrifying Penalties” Resulting from License Revocation

The revocation of social insurance eligibility is not simply a matter of “returning to National Health Insurance starting tomorrow.” Since the process is applied
retroactively over the past several years, it results in extremely severe financial and administrative penalties.

(1) “Retroactive Enrollment” in National Health Insurance and High Retroactive Payments

If your eligibility for social insurance is retroactively revoked (for a period of up to about 2 to 3 years), you will be treated as if you “should have been enrolled in National Health Insurance the entire time.”

Since National Health Insurance premiums are calculated based on the previous year’s income, if you generated sufficient profits from your self-employment business, you will be billed in a single lump sum for National Health Insurance premiums ranging from several hundred thousand yen to one million yen per year.

② Claims for reimbursement of medical expenses (70%–80%)

If you used your social insurance card to receive medical treatment during the period in which your eligibility was revoked, you must reimburse the full amount of medical expenses that were covered by your health insurance association or the National Health Insurance Association (the remaining 70% to 80%, excluding the 30% copayment).

③ Restrictions on refunds of social insurance premiums already paid and increased administrative burdens

The process of obtaining a refund of social insurance premiums you have paid can be very time-consuming, and depending on the circumstances—such as fraudulent cases or procedural delays—there is a risk that you may not receive the full amount back without any issues.

[Worst-Case Scenario]

With “retroactive demands for high National Health Insurance payments” and “full reimbursement of past medical expenses” coming at you all at once, there is a risk that you could run out of cash on hand.

Why is this problem surging right now?

This is due to the rapid spread of information and changes in the social insurance system.

• The
  Spread of “Tax-Saving Tips” on Social Media On platforms such as TikTok, YouTube, and X (formerly Twitter), superficial information is being shared as “ways to legally reduce social insurance premiums.”
• The Existence
  of Unscrupulous Consultants and Scheme Sellers: There are businesses that charge “commissions” or “monthly fees” to enroll people in shell corporations, and users are getting caught up in these schemes without realizing the risks involved.
• As public agencies expand the application of appropriate regulatory measures (such as stricter enforcement)
  , the investigation and verification systems—established through collaboration between pension offices and local governments—to address “nominal employment” and “fictitious coverage” are becoming stricter year by year.

Essential Knowledge and Decision-Making Criteria for Sole Proprietors

We have outlined the key points for running your business properly without relying on simplistic tax-saving schemes.

The principle governing social insurance enrollment is “actual circumstances.”

It’s not just about having a formal contract; what really matters is whether you’re “actually performing work for that company and receiving fair compensation in return.”

The Proper Way to Enroll in Social Insurance If You Absolutely Must

If you wish to enroll in social insurance (health insurance and the Employees’ Pension Insurance) legally, you must correctly establish the following “facts.”

1. "Incorporate" your business: Establish a corporation on
   your own, create a business entity, and then set and pay director compensation.
2. Actually works
   for another company as an employee or officer, meets certain minimum working hour requirements and other specified conditions, and receives actual wages or compensation.

[Self-Check] Are You Properly Enrolled in Social Insurance?

If any of the items on the following checklist apply to you, you may be at risk of having your license revoked in the future.

• [ ] Enrolled in social insurance through a company that is not actually conducting business
• [ ] Serving as a nominal officer solely to reduce social insurance premiums
• [ ] There is no evidence of payments or salary deposits (such as bank account statements, etc.)
• [ ] I am using a “tax-saving scheme” that I purchased through social media or from an acquaintance
• [ ] My main source of income (in reality) is revenue from my work as a sole proprietor.

Summary: What Was Intended as a Temporary “Tax Savings” Turned Into a “Huge Loss”

Using a social insurance scheme that has no basis in reality simply because “everyone else is doing it” or “I heard it’s legal” is tantamount to taking on enormous financial risks in the future.

The social insurance system is “applied based on actual circumstances” and cannot be used merely for tax-saving purposes by fulfilling the formal requirements.
If you suspect that you may have enrolled in the system improperly, we strongly recommend that you consult a tax accountant, social insurance and labor consultant, or other professional as soon as possible to ensure your enrollment is brought into compliance.