What are embedded and non-embedded deductibles? If you have family health insurance coverage, it’s important for you to understand the type of deductible your plan uses. You’ll also want to stay current on the rules for family health plans. Not understanding types of deductibles or being aware of the latest IRS rules may lead you to unknowingly select a health plan that could increase your medical expenses significantly.
This article clarifies the difference between embedded and non-embedded deductibles. This will help you better understand your health insurance plan and make informed decisions for your family. It also provides information on recent laws that could impact your health insurance decisions. Let’s begin by clarifying the term “deductible”:
What is an Insurance Deductible?
A deductible is the amount of money you must pay for covered medical care before the insurance company will begin paying. For example, if you have an $800 deductible, you will have to pay for all health care costs until you’ve reached $800. After that, your insurance will start paying, although you may owe a copay or coinsurance amount. The deductible starts over annually.
The deductible may not apply to all health care services, such as preventive care, which might be covered by your insurance regardless of whether you’ve met your deductible. In addition, not every medical expense you have counts toward your deductible. For example, if you have a service such as plastic surgery, which is not a covered benefit, those out-of-pocket expenses won’t help meet your deductible.
Let’s say Juan’s health insurance has an $800 deductible, and he has had no health care expenses yet this year. Then Juan slips off a ladder while cleaning the gutters and breaks his leg. The X-rays, cast and crutches cost $700, meaning Juan will pay the entire amount out of pocket because he has not yet met his deductible.
Insurance plans can cover an individual or a family. A family can apply to 1) a member and spouse, 2) a member and children, or 3) a member, spouse and children. If the plan is for family coverage, the deductible can be designed as either an embedded or non-embedded (or aggregate deductible). Let’s explain those terms.
What is an Embedded Deductible?
An embedded deductible is where each family member has an individual deductible in addition to the overall family deductible. When a family member meets his or her deductible before the family deductible is reached, the insurance company will begin paying according to the plan’s coverage for that member. If only one family member meets an individual deductible, the rest of the family still has to pay their deductibles.
Out-of-pocket expenses used to meet an individual deductible are counted toward meeting the family deductible, which is normally twice as large as an individual deductible. However, after an individual meets his or her deductible, coinsurance or copays typically will not count toward the family deductible. Once the family deductible is met, all family members will have medical expenses paid according to the plan’s coverage, even if they have not met their own individual deductibles.
Embedded Deductible Example
Susan and John have a family health plan that covers them and their three children. Each family member has a $500 individual deductible, and they have a $1,000 family deductible. Susan meets her $500 deductible after giving birth to their youngest child in February. The son, Tommy, breaks his leg and also meets his $500 individual deductible in March, which means the family deductible of $1,000 has now been met. Later in the year, when John needs carpal tunnel surgery, he only owes a copayment because the family deductible was already met.
What is a Non-embedded (Aggregate) Deductible?
A non-embedded, or aggregate, deductible is simpler than an embedded deductible. With a non-embedded deductible, there is only a family deductible. All family members’ out-of-pocket expenses count toward the family deductible until it is met, and then they are all covered with the health plan’s usual copays or coinsurance. It doesn’t matter if one person incurs all the expenses that meet the deductible or if two or more family members contribute toward meeting the family deductible. The non-embedded deductible is most common in high deductible health plans.
Non-embedded Deductible Example
Antonio and his family have a health plan with a non-embedded deductible. The family deductible is $2,600. Daughter Isabella had acute appendicitis that required surgery costing $2,300. Antonio sprained his ankle and medical care cost $400. The combined out-of-pocket expenses from Isabella’s and Antonio’s medical treatments met the family deductible. Any further medical care for anyone in the family will be covered by the insurance company according to the plan benefits.
Comparing Embedded vs Non-embedded Deductibles
Non-embedded deductible policies are generally less expensive than embedded deductible policies. However, with non-embedded deductible plans, the total family deductible must be met before any family member’s bills will be covered.
Embedded deductible plans are best when you anticipate that one family member will have a large number of medical costs during the year, and you anticipate the medical expenses for other family members will be relatively low.
Keep in mind that an embedded deductible plan requires the pooling of individual deductible expenses of at least two family members in order to reach the family deductible and receive coverage for the whole family. Once a family member meets their individual deductible, the post-deductible benefits kick in and begin paying. They are then required to pay copays or coinsurance, which are not credited toward the family deductible (although they are credited toward the family’s out-of-pocket maximum). Since the individual deductible is so much smaller than the family deductible, one family member won’t be able to satisfy the entire family deductible themselves.
Regardless of which type of deductible your plan uses, remember that you will need to pay that amount out of pocket before your insurance will start paying. Understanding how your deductible works will help you plan and save for your family’s medical expenses.
As an example, suppose you expect a family member to require expensive surgery in the near future, and you would like your health insurance to pay as much as possible. In this case, purchasing a plan with an embedded deductible would be better because the lower individual deductible would allow medical benefits to be paid sooner for your family member. If you have relatively few medical expenses, your family’s total deductible payments for the year may be less than the family deductible.
The added deductible benefit does come at the cost of an increased monthly or annual premium that you pay for the policy. Non-embedded deductible health insurance policies are cheaper and can save you money if you think that a family member would not incur a large medical expense during the plan year. However, it is difficult to predict your anticipated medical expenses.
How to Determine Your Deductible Type
If you’re not sure what type of deductible you have, there are easy ways to find out. If you have an employer-sponsored plan, you will have a Summary of Benefits or you can ask your human resources department. If you have an embedded deductible, you’ll see the individual and the family deductible listed. If you have an Affordable Care Act (ACA) plan, the information should be included in the “Coverage for” section of your Summary of Benefits and Coverage (SBC). If you’re comparing health plans online, you should find this information listed under “Plan Details.”
ACA Impact on Deductibles
In the past, non-embedded deductibles were difficult for small families because they have fewer people to reach the high deductible. The passage of the ACA required ACA-compliant plans to have embedded out of pocket maximums. Consequently, most ACA-compliant plans now have embedded deductibles. In addition, all family deductibles must be no more than double the individual deductible rate. Both of these measures were an effort to alleviate the financial stress on smaller families.
Embedded Out-of-Pocket Maximums
New rules went into effect in 2016 that require all family health care plans to have embedded out-of-pocket maximums, and they limit the amount an individual family member is required to pay in out-of-pocket costs (in-network) during the year. For 2021, the individual out-of-pocket maximum limit is $8,550. Exceptions to the ACA’s out-of-pocket limit rule are available for certain small group plans eligible for transition relief. A one-year extension of transition relief in 2020 extended the transition relief to policy years beginning on or before October 1, 2021, provided that all polices end by December 31, 2022. This transition relief has been extended each year since the initial announcement in 2013.
IRS Rules for HDHP’s and HSA’s
If you have a family High Deductible Health Plan (HDHP) with an embedded deductible and you want to contribute to a Health Savings Account (HSA), you must make sure your plan’s embedded deductible meets the minimum requirement specified by the IRS. The IRS minimum individual deductible for 2021 is $2,800, so your plan’s individual deductible must equal or exceed that amount to qualify to contribute to an HSA. Any HDHP plan with a lower deductible would be ineligible for HSA contributions.
Let’s take the example of you buying an HDHP embedded family plan with $2,500 individual and $5,000 family deductibles. If you incurred $3,000 of medical expenses, with the individual deductible set at $2,500, then $500 of the expenses would be eligible for coinsurance from the insurer. However, this policy would not pass the IRS regulations for a qualified HSA, because benefits would be paid before the minimum deductible of $2,800 was met.
As another example, let’s say the policy you selected had a $3,000 individual and $6,000 family embedded deductible. If you incurred medical expenses of $3,500, then you would meet your individual deductible limit, and your insurer would begin to pay for your medical expenses. In addition, the IRS minimum deductible of $2,800 would be met and the plan would be HSA qualified.
Employers should be aware of the following IRS rules for 2021:
- HDHPs cannot have an embedded family deductible that is lower than the minimum HDHP family deductible of $2,800.
- The out-of-pocket maximum for family coverage for an HDHP cannot be higher than $14,000.
- All non-grandfathered plans (whether HDHP or non-HDHP) must cap out-of-pocket spending at $8,550 for any covered person. A family plan with an out-of-pocket maximum in excess of $8,550 can satisfy this rule by embedding an individual out-of-pocket maximum in the plan that is no higher than $8,550. This means that for the 2021 plan year, an HDHP subject to the ACA out-of-pocket limit rules may have a $7,000 (self-only)/$14,000 (family) out-of-pocket limit (and be HSA-compliant) so long as there is an embedded individual out-of-pocket limit in the family tier no greater than $8,550 (so that it is also ACA-compliant).
Have further questions about embedded and non-embedded deductibles? Feel free to email, call or chat with us! We’re more than happy to assist in any way we can.