November 15, 2017 

Embedded deductibles or out-of-pocket maximums (“OOPMs”) can be useful for plan design, but can also present compliance challenges. The Affordable Care Act’s OOPM rule and the interplay with high-deductible health plan requirements can sometimes leave people scratching their heads.

What Does it Mean for a Deductible or OOPM to be Embedded?
An embedded deductible or OOPM is an individual, lower deductible/OOPM inside a family deductible/OOPM. Once the individual hits this lower threshold, the plan pays as if the individual hit the deductible/OOPM, even if the total for the family is less than the overall family deductible/OOPM.

For example, assume Employee A elects family coverage for A, his spouse, and his child with a $3,000 deductible and an embedded per-covered person deductible of $1,500. At the beginning of the plan year, A breaks his arm when he falls off a ladder and has $2,000 in charges. The first $1,500 will count against the embedded deductible. However, the last $500 will be paid at the co-insurance level under the plan because A hit the embedded deductible. By contrast, if A’s plan did not have an embedded deductible, which is known as an aggregate deductible, all $2,000 would count against the $3,000 family deductible. Therefore, embedded deductibles ease the burden on individuals when family deductibles are high, but they can also increase plan costs. Embedded OOPMs work in much the same way.

High-Deductible Health Plans (HDHPs)
Embedded deductibles are not required, but some companies choose them to make their plans more attractive. However, the challenge comes when an employer wants to put an embedded deductible in a HDHP. HDHPs allow eligible individuals to make health savings account (“HSA") contributions, which provide the account holders with the ability to save for health expenses on a tax-preferred basis. In exchange for these benefits, HDHPs have strict rules governing minimum deductibles.

Family coverage under a HDHP cannot have a deductible, embedded or not, less than the HDHP minimum amount ($2,700, for 2018). No individual member of the family can have a lower deductible than that. (For HDHP purposes, “family” is any coverage that covers more than employee only.)

Specifically, the IRS has said that, “a plan is an HDHP only if, under the terms of the plan and without regard to which family member or members incur expenses, no amounts are payable from the HDHP until the family has incurred annual covered medical expenses in excess of the minimum annual deductible”. (See, IRS Notice 2004-02, Q/A-3)

For example, the 2018 minimum HDHP deductibles are $1,350 for self-only coverage and $2,700 for family coverage. Because of this IRS rule, a plan could not use $1,350 or even $2,000 as an embedded deductible. A plan could, however, have an overall family deductible of $4,000 and embed an individual deductible of $2,700 or more for each covered person within the family deductible.

Embedded OOPMs
Embedded OOPMs work the same way as embedded deductibles. However, unlike embedded deductibles, embedded OOPMs are required. In 2015, HHS said that the Affordable Care Act (“ACA”) individual OOPM ($7,350 for 2018) applies to each covered individual, whether the individual has self-only or family coverage. This rule applies to plans of all sizes, regardless of whether the sponsor is insured or self-funded.

As a result, starting with plan years beginning in 2016, plans were required either to:

1. incorporate an individual embedded OOPM under the family OOPM ($14,700 for 2018), or

2. maintain an aggregate deductible no greater than the individual OOPM.

(See, ACA FAQs Part 27, Q&As 1-3)

However, HDHPs have a separate maximum on the family OOPM. This means HDHPs must have an overall family OOPM that is the lesser of the HDHP OOPM ($13,300 for 2018) or the HHS-required family OOPM ($14,700 for 2018). Because of how the inflation adjustments work, the HDHP OOPM is likely to be the lower of the two for the foreseeable future. HDHPs also have to comply with the ACA embedded individual OOPM rule.

These concepts are best illustrated in the following chart:

OOPMs Chart

The interactions of these rules can be boiled down to three basic principles:

1. HDHPs cannot have an embedded family deductible that is lower than the minimum HDHP family deductible ($2,700, for 2018).

2. The OOPM for a HDHP cannot be higher than the lesser of the HDHP OOPM ($13,300 for 2018) or the HHS OOPM ($14,700 for 2018).

3. Plans (whether HDHP or not) must have a maximum individual OOPM that’s no higher than the ACA maximum ($7,350 for 2018). Family plans can satisfy this rule either by capping the whole family deductible at that amount or by putting in an embedded OOPM in the plan of no higher than that amount.

View more compliance articles in our Compliance Directory.

The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.