How Embedded Deductibles Work on HSA-qualified Plans

by William G. Stuart | Originally posted on Health Savings Academy

Embedded deductibles are permissible on HSA-qualified plans. But the benefit design is key to compliance.

The words embedded and aggregate mean little outside the cozy world of benefits professionals. But to the people whom they serve - employees and nongroup buyers who purchase medical coverage with ever-increasing deductibles - the difference in these two forms of deductible design may mean thousands of dollars spent or saved.

Let's dive into this important topic.

Embedded Versus Aggregate Deductible

Deductibles (and out-of-pocket maximums) are designed as either embedded or aggregate.

Aggregate Deductible. A family faces a single deductible to which all family members' claims apply.

Example 1: Pearls' Twirls, a maker of large lollipops, offers its employees an HSA-qualified plan with a $4,000 family deductible. Wendy, the daughter of the marketing director, breaks her ankle early in the plan year and incurs $4,700 of claims for x-rays, consultations, and setting the ankle. Wendy's family pays the first $4,000 of deductible expenses before the plan picks reimburses some of or all the remainder. All family members receive the post-deductible level of benefits (in this case, full coverage except for copays of prescription drugs) for the balance of the plan year.

This design is easy to understand and administer because all claims are dumped into a single family bucket. When that bucket is full, the plan begins to pay claims at the post-deductible level.

Embedded deductible. Under this design, the family has a deductible ceiling, but each family member also has a lower individual deductible limit. A family member can satisfy his personal deductible without meeting the family responsibility.

Example 2: Mack's Baby Backs, a barbecue restaurant, offers employees an HSA-qualified plan with a $6,000 family deductible and an embedded $3,000 individual deductible. Giselle enrolls her family. During the year, Giselle meets her $3,000 deductible with an inpatient stay, after which she pays 10% coinsurance on her additional claims. Her twins, Mel and Del, incur $750 and $1,2500, respectively, in deductible expenses. Not until Mel, Del, and her husband Clell (aka Butch) incur an additional $1,000 of deductible expenses among them will these other family members begin to receive the post-deductible level of benefits (10% coinsurance).

Each claim under an embedded-deductible plan is, in effect, copied and placed into two buckets: the family bucket and the individual family member's bucket. One family member usually has her claims reimbursed at the post-deductible level as other family members remain below their individual deductible. Once the combined claims applied to the deductible reach the deductible ceiling, everyone in the family is covered at the post-deductible level.

Example 3: Same as example 2. Then, Del undergoes day surgery, and the first $1,000 of his additional claims satisfy the family deductible. Now, every family member, even Butch (who had no claims applied to the deductible) receives the post-deductible level of benefits, even though only one family member - Giselle - reached her individual $3,000 deductible.

Example 4: No one in the family reaches his or her individual deductible. But Giselle ($2,000 in claims), Mel (1,500), Del ($1,000), and Butch ($1,500) reach $6,000 combined. All four begin to receive the post-deductible level of benefits.

A Rule of Thumb

Be sure you understand how a plan's deductible works. Here's one tip: A plan can't be HSA-qualified if the family contract begins to reimburse any member for services other than select preventive care before the member incurs at least the statutory minimum annual deductible's worth of claims.

Example 5: New Era Insurance's Advantage-Plus Plan has a $4,000 family deductible with an individual embedded deductible of $2,000. This plan is not HSA-qualified because it could begin to pay benefits to one family member before the family met the statutory minimum annual deductible of $3,200 in 2024.

The key to compliance is design, not utilization. If the plan design makes it possible for one family member to satisfy her individual deductible and begin to receive the post-deductible level of benefits before the family incurred at least $3,200 of claims applied to the deductible, the coverage doesn't meet the standard of an HSA-qualified plan.

The rule of thumb: Any deductible description less than "$