Deductibles can be confusing. If you have family health insurance coverage, it’s incredibly important for you to understand the type of deductible your plan uses. What are embedded and non-embedded deductibles exactly? 

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.

We recently heard a story about a couple who thought they were prepared for the high medical expenses they were incurring. They had $5,000 in a HSA account and were enrolled in a group health plan that showed a $7,500 deductible.

However, they kept receiving medical bills after reaching their deductible. And the bills continued until they reached $15,000. The couple discovered that their deductible was non-embedded and they were responsible for their medical expenses up to the family deductible of $15,000. Instead of covering the $2,500 they expected, they had to come up with an additional $10,000 of their own money!

Because of stories like this, we offer this article to clarify the difference between embedded and non-embedded deductibles. It will help you better understand your health insurance plan and make informed decisions for your family. This article also provides information on recent laws that could impact your health insurance decisions. Let’s begin by explaining 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.

Deductible Example

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 must still pay their deductibles.

Out-of-pocket expenses used to meet an individual deductible are counted toward meeting the family deductible. This 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. 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.

What is an Out-of-Pocket Maximum?

An out-of-pocket maximum (or out-of-pocket limit) is the maximum amount you would pay in a year for covered, in-network services. Services that are subject to your deductible, coinsurance and/or copays reduce the amount you owe toward your out-of-pocket maximum.

Comparing Embedded vs Non-embedded Deductibles

An embedded deductible provides an additional layer of protection against high out-of-pocket costs for an individual family member. This additional protection comes at a price, which is a higher premium.

Embedded deductible plans are best when you anticipate that one family member will have relatively high medical costs during the year. And you anticipate the medical expenses for other family members will be relatively low. The embedded deductible allows the sickest individual to receive post-deductible claim payments quickest. Yet the other family members don’t benefit from it unless they also have several medical claims.

Keep in mind that an embedded deductible plan requires the pooling of individual deductible expenses of at least two family members 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.

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. Even though one individual could meet the family deductible for all members, it takes longer and costs more to receive post-deductible claim payments.

The best plan for your family depends on your family circumstances. If you anticipate one family member will incur a significant amount of medical expenses, an embedded deductible would probably be best. If you expect two or more family members to incur a moderate amount of medical expenses, an aggregate approach might be better. If your entire family has low claims (less than the embedded deductible), or everyone in your family has high claims, the deductible type may not matter.

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.

Comparison Example

As an example, suppose you expect a family member to require expensive surgery soon, 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 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 2023, the individual out-of-pocket maximum limit for a family plan is $9,100.

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. For 2023, the IRS minimum individual (embedded) deductible must be at least as much as the family minimum for the year, which is $3,000. Therefore, 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 $3,000 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 $3,000 would be met and the plan would be HSA qualified.

Employers should be aware of the following IRS rules for 2023:

• HDHPs cannot have an embedded family deductible that is lower than the minimum HDHP family deductible of $3,000.
• The out-of-pocket maximum for family coverage for an HDHP cannot be higher than $15,000.
• All non-grandfathered plans (whether HDHP or non-HDHP) must cap out-of-pocket spending at $9,100 for any covered person. A family plan with an out-of-pocket maximum in excess of $9,100 can satisfy this rule by embedding an individual out-of-pocket maximum in the plan that is no higher than $9,100. This means that for the 2023 plan year, an HDHP subject to the ACA out-of-pocket limit rules may have a $7,500 (self-only)/$15,000 (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 $9,100 (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.