Many employers have adopted high-deductible health plans (HDHPs) in conjunction with health savings accounts, or HSAs, and those programs may have to be revamped next year.
An HDHP is a plan with relatively high deductibles which, in turn, translates into lower premiums than traditional health plans. The employee then establishes an HSA and the employer and/or employee can contribute money into it. That money accumulates in the HSA to help pay claims that are not reimbursed under the HDHP. HSAs receive favorable tax treatment. The amounts contributed to the HSA are tax deductible, accumulate tax-free and the distributions are nontaxable, as long as the amounts are spent on medical expenses.
The Department of Labor and the Department of Health and Human Services have recently indicated health care reform is imposing new restrictions on these health plan designs. One of the new provisions under health care reform places limits on the maximum out-of-pocket amounts people have to pay with respect to in-network benefits under non-grandfathered health plans. That is, there are caps on how much people have to pay before the health plan kicks in and starts paying benefits. Previously, some health plans established the plan’s maximum out-of-pockets on a “non-embedded basis.” Under this approach, the plan did not pay any benefits until the plan’s total out-of-pocket was satisfied.
For example, an HDHP may have a $6,000 out-of-pocket maximum for single coverage and a $12,000 maximum out-of-pocket for family coverage. Under a “non-embedded” approach, the plan would not begin paying benefits for an employee that elected family coverage until one or more family members incurred $12,000 in expenses. In other words, the plan did not begin paying benefits until the family unit, as a whole, hit the $12,000 maximum out-of-pocket. So, if one individual incurred $8,000 in medical expenses, the plan did not pay anything because the family maximum out-of-pocket of $12,000 had not yet been satisfied. Of course, the $8,000 the person paid would go toward meeting the family maximum out-of-pocket.
The government is saying that, for plan years beginning on or after Jan. 1, 2016, plans have to adopt an “embedded” approach. Under this scenario, the plan has to begin paying benefits for each individual under family coverage once that person hits the maximum out-of-pocket for single coverage.
Using the previous example, the HDHP has a $6,000 out-of-pocket maximum for single coverage and a $12,000 maximum out-of-pocket for family coverage. Under the “embedded” approach, the plan has to begin paying benefits whenever an individual satisfies the maximum out-of-pocket for single coverage. So, in the previous example where the employee elected family coverage and an individual incurred medical expenses of $8,000, the plan has to pay $2,000 (i.e. the amount exceeding the single maximum out-of-pocket $6,000) even though the family, as a whole, has not yet satisfied the $12,000 family maximum out-of-pocket. Note that only $6,000 counts toward satisfying the family maximum out-of-pocket because that is all the individual paid before the plan started paying.
Once the family, as a whole, incurs expenses meeting the family maximum out-of-pocket, the plan begins paying benefits whether the plan is embedded or non-embedded. However, many families do not hit the family maximum out-of-pocket so the recent change could impact a significant number of employees. On the other side of the coin, if the plan ends up paying more claims, the premiums will go up. That is, there are no free lunches when it comes to health care, and if the plans pay more claims, the premiums will increase.
The government has indicated these rules apply to all non-grandfathered health plans regardless of the employer’s size or if the plan is fully insured or self-funded. Therefore, all employers should review their current plan designs to determine if the plan will have to be modified next year to comply with health care reform. You can visit the Department of Labor’s website for more information about this rule.
Paul Routh is an Attorney at Dunlevey, Mahan & Furry, a provider of comprehensive legal services to discerning businesses throughout the United States. For more information, visit www.dmfdayton.com.