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.
Deductible example: 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 a member and spouse, member and children or member, spouse and children. If the plan is for family coverage, the deductible can be designed as either an embedded or non-embedded 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 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.
Here is an 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. 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 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.
Here is a 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.
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.
2016 Rule Changes
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. The individual out-of-pocket maximum limit for 2021 is $8,550.
IRS Rules for 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 2020 and 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.
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.
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