Health insurance policies typically contain a deductible. A deductible is the amount of money you must pay out-of-pocket for your medical expenses before your insurance will cover the costs of your medical care: hospital stays, emergency room visits, doctors visits, etc. Your deductible must be met on an annual basis, and the annual time frame is either based on the plan year or a calendar year. There are two different types of deductibles: traditional, also called embedded, and aggregate, also known as non-embedded. You may have some benefits (i.e., preventive care) for which the deductible does not have to be satisfied before your insurance will pay the costs of your doctor visit.
If you are on a family (two or more members covered) medical plan with an embedded deductible, your plan contains two components, an individual deductible and a family deductible. Having two components to the deductible allows each member of your family the opportunity to get her medical bills covered prior to the entire dollar amount of the family deductible being met. The individual deductible is embedded in the family deductible.
For example, if you, your wife and daughter are on a family plan with a £1,950 family embedded deductible, including an individual deductible of £650, and your daughter incurs £650 in medical bills, her deductible is met and your insurance will help pay any subsequent medical bills for your daughter that year even though the family deductible of £1,950 has not yet been met.
On the other hand, if your insurance policy contains a non-embedded family deductible, an individual deductible is not embedded in the family deductible. In this situation, before your insurance helps you pay for any of your family's medical bills, the entire amount of the deductible must be met. It can be met by one family member or by a combination of family members. There are no benefits until expenses equalling the deductible amount have been incurred.
There are numerous insurance plan types, and each type can have either an embedded or a non-embedded deductible. One plan type is called the high deductible health plan (HDHP), for which a minimum annual deductible amount is required by the Internal Revenue Service (IRS). Members on an HDHP are allowed to open a tax-free health savings account (HSA), hence the IRS involvement in the plan design.
If your HDHP family plan has an embedded deductible and the individual deductible amount of one person in your family is lower than the minimum annual family deductible required, the plan does not qualify as an HDHP and you are not eligible for the tax savings.
For example, if the family annual deductible required by the IRS is £2,275, and the plan has an embedded deductible allowing an individual deductible of £975, the plan does not qualify as a HDHP because the deductible cannot be less than the deductible required ($3500) for a family plan.
Having a non-embedded deductible or no individual deductible within the family deductible would ensure that the correct minimum annual deductible amount is met for income tax purposes.
How Do I Know?
There are there ways to find out what type of deductible your insurance plan has. The first is to obtain a copy of your insurance benefit book and look at the definitions section. The deductible definition may detail embedded vs. non-embedded. If the booklet is not available and you are on an insurance plan through your employer, ask your human resource representative which type of deductible your plan has. If she does not know, or if you are not on a group plan, call the member services phone number located on your ID card and ask a representative at your insurance company for the details.