In the healthcare world, a deductible is the amount consumers must pay out-of-pocket before their health insurance coverage begins paying for covered medical services. That’s why, assuming your plan offers choices, selecting the right deductible amount is an important decision. If you own a Health Savings Account (HSA), it’s vital that you know the impact of a high deductible health plan with embedded deductibles on your HSA.
What is a deductible?
By now, most consumers are aware of deductibles and their role in healthcare plans. Basically, deductibles ensure that consumers pay a share of their healthcare costs while also encouraging them to become informed consumers of healthcare services. But deductibles aren’t as simple as they may seem.
In addition to basic deductibles, there are two other kinds of healthcare deductibles that can be confusing. One is called an “embedded” deductible. The other is an “aggregate” deductible.
If you have a High Deductible Health Plan (HDHP) with an embedded deductible, you may not be able to open or contribute to an HSA. See below for an explanation of embedded versus aggregate deductible.
Embedded Deductibles
A health plan that covers a family usually has one total deductible for the family and individual deductibles for each family member on the plan. The individual deductibles are also known as embedded deductibles. They are usually half the amount of the total family deductible. The advantage of embedded deductibles is that individual family members don’t have to meet the full family deductible to begin receiving after-deductible benefits. Instead, their benefits kick in as soon as they meet their individual deductibles.
For example, suppose a family’s total annual deductible is $5,000 and the embedded deductible for each family member is $2,500. Individual family members only have to pay $2,500 out of pocket before their embedded deductible benefits begin. The money credited to an embedded deductible also gets credited to the family deductible. This allows allows families to reach the total deductible limit sooner. Once a family reaches the total deductible limit, embedded deductible limits no longer apply. Embedded deductibles are generally used in non-High Deductible Health Plans.
Aggregate Deductibles
In plans with aggregate deductibles, the total family deductible must be met before any individuals can begin receiving post-deductible benefits. The aggregate deductible can be met when the combined out-of-pocket healthcare expenses from everyone in the family reaches the annual limit. It can also be met when one individual’s expenses reach or exceed the family limit. Aggregate deductibles are used in High Deductible Health Plans (HDHP). A healthcare expense must be covered in the plan in order to be credited toward the deductible.
Knowing the difference between embedded and aggregate deductibles is especially important during the annual enrollment period. Family coverage with an aggregate deductible may have a lower monthly premium, which can save money if the family is generally healthy and has low healthcare expenses. However, families that anticipate high expenses for one or more members may benefit from an embedded deductible.
Impact of HDHP with an Embedded Deductible on HSAs
Another aspect of embedded deductibles that must be considered is their impact on Health Savings Accounts. In order to qualify for an HSA, you must be enrolled in a qualified HDHP. Since embedded deductibles typically lower out-of-pocket costs for healthcare consumers, most plans that contain them do not qualify as an HDHP. To qualify, the embedded deductible for individuals must be equal to or more than the IRS minimum family deductible.
IRS Minimum HDHP Deductible Limits
| 2021 | 2020 | |
| Individual Coverage | $1,400 | $1,400 |
| Family Coverage | $2,800 | $2,800 |
Consider this. The minimum family deductible is usually twice as much as the individual. Therefore, if you want an HDHP with embedded deductibles in 2020, the minimum individual deductible must be at least $2,800. If you opt for an HDHP without embedded deductibles, the minimum deductible will only be $1,400. Keep this in mind when selecting a plan and trying to open an HSA.
Embedded deductibles can save thousands of dollars by fulfilling individual deductibles before reaching the family deductible. However, depending on the plan, they can prevent you from participating in an HSA. If you’re not sure which is the best option for your needs, contact your company’s HR department or the health plan provider for assistance.
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