UPDATE: “Embedded” Out-of-Pocket Limits Might Will Be Required for 2016 Plan Years 

Tri-agency guidance issued May 26, 2015 confirmed that the embedded out-of-pocket limits interpretation explained in the following article applies to non-grandfathered employer-sponsored group health plans. While the agencies provided this guidance through FAQs (not regulations), it’s the last nail in the coffin of hopes that employers would not be required to implement this change. Under the embedding interpretation, a non-grandfathered group health plan would violate the ACA maximum out-of-pocket limit provision during its 2016 plan year unless it applied an out-of-pocket limit no higher than $6,850 to each individual enrolled as part of a family and, in addition, applied an overall out-of-pocket limit to the family no higher than $13,700.

Federal regulators have stated – informally and unofficially – that employer-sponsored group health plans will be subject to a controversial interpretation of the Affordable Care Act’s (ACA) provision that limits the cost-sharing (e.g., deductibles, copayments and coinsurance) plans may require of enrollees.

Note on ACA/Insurance Jargon: Plan provisions that limit enrollees’ cost-sharing are often called “out-of-pocket limits,” and we’re using that term here.

The ACA’s Maximum Out-of-Pocket Limits on Essential Health Benefits

The ACA disallows a non-grandfathered health plan from having annual out-of-pocket limits for essential health benefits that are higher than $6,600 for self-only coverage and $13,200 for family coverage. These are the maximum annual out-of-pocket limits for plan years starting in 2015. For plan years starting in 2016, the maximum out-of-pocket limits increase to $6,850 and $13,700, respectively. If a plan has a network, these restrictions apply only with respect to in-network services. For details on how the maximum out-of-pocket limit provisions apply to employer-sponsored health plans and how those plans identify their essential health benefits, see our Alert.

Background Note on ACA Regulations. The three agencies responsible for implementation of the maximum out-of-pocket limit mandate are the Departments of Health and Human Services (HHS), Labor (DOL) and Treasury (through the Internal Revenue Service (IRS). They have typically issued regulations and other guidance concerning the ACA’s benefit mandates (e.g., preventive care coverage) jointly. The agencies have issued a few FAQs on the maximum out-of-pocket limit provision, but have not issued the type of tri-agency regulations we have come to expect for the ACA benefit mandates.

HHS has independently issued regulations under the maximum out-of-pocket limit provision, explaining how it applies to insurance programs seeking “qualified health plan” status. Those regulations do not apply to employer-sponsored plans (but might apply to insurance policies that smaller employers purchase to provide coverage to their employees). The DOL and IRS (the agencies whose regulations govern most employer-sponsored plans) have not explained how much credence employers should give the HHS maximum out-of-pocket limit regulations in designing and administering their plans.

HHS’ Controversial Interpretation of the Maximum Out-of-Pocket Limits

Earlier this year, HHS stated that the maximum out-of-pocket limit mandate requires that each enrollee – including an individual that is part of an enrolled family – have his or her own individual out-of-pocket limit on essential health benefits that is no higher than the maximum self-only out-of-pocket limit.

Note on ACA/Insurance Jargon. Having a separate individual out-of-pocket limit for each family member in addition to an overall family out-of-pocket limit is referred to as having an “embedded” out-of-pocket limit. In contrast, if a plan had a non-embedded out-of-pocket limit, the amount of out-of-pocket expenses that any one family member incurred would not matter. The out-of-pocket limit would not be met until the total of all family members’ out-of-pocket expenses reached the family out-of-pocket limit.

Under HHS’ interpretation, a plan would violate the ACA maximum out-of-pocket limit provision during its 2016 plan year unless it applied an out-of-pocket limit no higher than $6,850 to each individual enrolled as part of a family and, in addition, applied an overall out-of-pocket limit to the family no higher than $13,700.

The Interpretation is Not a Regulation. HHS’ embedded out-of-pocket limit interpretation was the proverbial needle in the annual regulatory haystack known as the “Notice of Benefit and Payment Parameters.” The interpretation appeared only in the preamble to the regulatory changes made by the Notice, and did not appear as an actual change to HHS’ regulations. HHS stated in the preamble that the interpretation is a “clarification” of existing rules. HHS later issued FAQs clarifying that the interpretation would apply to plan years starting in 2016. Aside from arguments about whether statements made in a preamble are binding on anyone, many would argue that HHS does not have authority to implement this provision with respect to employer plans (see “Background Note on ACA Regulations” above).

Employer Plans May Need to Comply with the HHS Interpretation

From the time HHS issued this interpretation, there have been questions about whether employer-sponsored health plans need to comply (see “The Interpretation Is Not a Regulation” above). Many sought informal guidance from IRS and DOL representatives on whether those agencies planned to apply this interpretation to employer plans, but received noncommittal responses. We have received reports that informal and nonbinding statements from IRS and DOL representatives have now confirmed that those agencies intend to join in HHS’ embedded out-of-pocket limit interpretation. There has been no report, however, of whether or when more tangible or official guidance might be issued.