By: HUB’s EB Compliance Team

Back in 2017 HUB originally wrote about embedded deductibles and out-of-pocket maximums (“OOPM”) in health plans. This remains one of HUB’s most widely viewed compliance articles, in part because this is a complex topic. As Top Gun: Maverick proved, sequels can be just as good (maybe even better?) than the original.

Background

Embedded deductibles/OOPMs occur, if at all, only in family coverage. For purposes discussed of this article, family coverage refers to all tiers of coverage other than employee only. 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. In contrast, aggregate deductibles or OOPMs have one single deductible or OOPM that the entire family unit must satisfy.

For example, assume Employee R elects family coverage for herself, her spouse, and her child with a $3,000 deductible and an embedded per-covered person deductible of $1,500. At the beginning of the plan year, R breaks her ankle when she falls while running 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 R hit the embedded deductible. In contrast, if R’s plan had only an aggregate deductible, all $2,000 would count against the $3,000 family deductible.

As compared to aggregate deductibles, embedded deductibles ease the cost burden on individuals when family deductibles are high. The benefits of embedded deductibles for employees translate to increased costs for plans, as plans pay more when participants pay less. Embedded OOPMs work in much the same way.

Embedded Deductibles and High-Deductible Health Plans (HDHPs)

Embedded deductibles are not required, but some employers use them to make their plans more attractive. However, employers face unique challenges when adding embedded deductibles to HDHPs. HDHPs are particularly attractive as they 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.

To be considered a qualified HDHP and thus HSA compatible, HDHPs must comply with the minimum HDHP deductibles released annually by the IRS. Family coverage under a HDHP cannot have a deductible, embedded or not, less than the HDHP minimum amount ($3,200 for 2024). No individual member of the family can have a lower deductible than that. (For HDHP purposes, “family” is any coverage that covers more than just the employee.)

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)

The 2024 minimum HDHP deductibles are $1,600 for self-only coverage and $3,200 for family coverage. Because of this IRS rule, a plan could not use $1,600 or even $3,000 as an embedded deductible. A plan could, however, have an overall family deductible of $4,000 (i.e., than the minimum HDHP deductible) and embed an individual deductible of $3,200 (i.e., the HDHP family maximum) or more for each covered person within the family deductible.

Embedded Deductible Confusion

Embedded deductibles are complex. At least some of the complexity may be driven by the increases to the HDHP minimum deductibles in recent years. In 2023, the minimum HDHP deductible for family coverage reached $3,000 for the first time.

While $3,000 may not seem like a significant number, it is in the world of HDHPs. Prior to 2023, many HDHPs had deductibles $1,500 for employee only and $3,000 for family. For example, in 2021 an HDHP could have used these deductibles and still had an embedded deductible at the family minimum because the family minimum deductible was only $2,800. This allowed the plan to still have an additional deductible for the family once the embedded deductible was satisfied. Once the family minimum deductible reached $3,000 in 2023, it forced all plans with $3,000 family deductibles to either use only aggregate deductibles or increase their overall deductible.

Embedded OOPMs

Embedded OOPMs work the same way as embedded deductibles. However, unlike embedded deductibles, embedded OOPMs are required unless the plan has an aggregate OOPM less than the individual OOPM. In 2015, HHS said that the Affordable Care Act (“ACA”) individual OOPM ($9,450 for 2024) 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, plans are required either to:

  1. incorporate an individual embedded OOPM under the family OOPM ($18,900 for 2024), or
  2. maintain an aggregate no greater than the individual OOPM.

(See, ACA FAQs Part 27, Q&As 1-3)

HDHPs are subject to separate maximums than non-HDHPs, which are only subject to the ACA maximums. This means HDHPs must have an overall family OOPM that is the lesser of the HDHP OOPM ($16,100 for 2024) or the HHS-required family OOPM ($18,900 for 2024). 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 must comply with the ACA embedded individual OOPM rule.

These concepts are best illustrated in the following chart:

OOPMs

HDHP MAX FOR 2024

ACA MAX FOR 2024

USING EMBEDDED APPROACH

USING AGGREGATE APPROACH

Individual Only

$8,050

$9,450

$8,050

$8,050

Embedded Individual OOPM in Family Tier

n/a

$9,450

$9,450

n/a

Family

$16,100

$18,900

$16,100

$9,450

Takeaways

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 ($3,200 for 2024).
  2. The OOPM for a HDHP cannot be higher than the lesser of the HDHP OOPM ($16,100 for 2024) or the HHS OOPM ($18,900 for 2024).
  3. Plans (whether HDHP or not) must have a maximum individual OOPM that’s no higher than the ACA maximum ($9,450 for 2024). Family plans can satisfy this rule either by capping the whole family OOPM at that amount or by putting in an embedded OOPM in the plan of no higher than that amount.

On a final note, employers are urged to make sure any plans described to employees as qualified HDHPs truly meet the requirements to be HSA compatible. This includes ensuring proper use of embedded deductibles.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.