As employers and plans prepare for 2016 open enrollment, they must be sure to address in their benefit design and with their third party vendors the new embedded out-of-pocket maximum limitations on individuals that were announced at the end of May by the U.S. Departments of Labor (“DOL”), Health and Human Services (“HHS”) and the Treasury (collectively, the “Departments”).

The Affordable Care Act (“ACA”) requires that non-grandfathered group health plans place limits on the maximum annual cost sharing imposed on plan enrollees for out-of-pocket costs associated with essential health benefits.  For plan and policy years beginning in 2016, the maximum out-of-pocket cost for self-only coverage is $6,850, while the maximum out-of-pocket cost for coverage that is not self-only coverage is $13,700.

On February 27, 2015, HHS issued the HHS Notice of Benefit and Payment Parameters for 2016 (the “2016 HHS Notice”), which explained that the self-only maximum annual limitation on out-of-pocket costs applies to each individual, irrespective of whether that individual is enrolled in self-only coverage or coverage that is not self-only coverage.  Initially, this appeared to apply only to small group and individual coverage.

However, on May 26, 2015, the Departments issued DOL FAQs Part XXVII, which clarify that the Departments intended to expand this rule to all non-grandfathered health plans, including non-grandfathered group health plans, large and small, insured and self-insured.  Thus, non-grandfathered large group health plans must apply this $6,850 annual maximum cost sharing cap to each individual, regardless of the type of coverage in which the individual is enrolled.

Therefore, if a participant has family coverage, his or her family members must have a combined out-of-pocket limit of no more than $13,700, such that when some combination of them reaches that amount, there is no further cost sharing.  However, even in this family coverage, there is an embedded individual out-of-pocket limit that cannot exceed $6,850, meaning that if any one of the family members reaches $6,850, there is no further cost sharing for that individual.

What Next?

Although some plans already use an embedded out-of-pocket limit, there are many that do not.  Accordingly, as employers plan for 2016 open enrollment, they must ensure that their benefit structures are consistent with this new rule.  This includes updating their summary plan descriptions and contacting their vendors to ensure that the administration is consistent with this rule.

Particular attention must be paid to non-grandfathered high deductible health plans (“HDHPs”), to which this new rule also applies.  High deductible plans often have no embedded limit, applying the family out-of-pocket maximum to all family members in the case of family coverage.

Implementation of the new rule in HDHPs may be particularly confusing to participants because the ACA maximum out-of-pocket limit differs from the IRS maximum out-of-pocket limit used to determine whether the HDHP can be coordinated with a health savings account (“HSA”).  Specifically, in 2016, for HDHP purposes, the lower IRS dollar limits are $6,550 for self-only coverage and $13,100 for family coverage with no embedded limit rule applicable (as compared to the ACA limit of $6,850 for self-only coverage and $13,700 for other than self-only coverage with an embedded limit rule).  What this means, effectively, is that for an HDHP that is intended to coordinate with an HSA, the maximum out-of-pocket limit for a particular individual will be $6,550 for a person with self-only coverage and $6,850 for a person with family coverage (subject to an earlier limit if the individual’s family hits the $13,100 family coverage limit).

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Photo of Robert Projansky Robert Projansky

Robert M. Projansky is a partner in the Employee Benefits & Executive Compensation Group and is currently a member of the Firm’s Executive Committee.

Rob has a broad practice advising both multiemployer and single employer clients on all issues related to the legal…

Robert M. Projansky is a partner in the Employee Benefits & Executive Compensation Group and is currently a member of the Firm’s Executive Committee.

Rob has a broad practice advising both multiemployer and single employer clients on all issues related to the legal compliance and tax-qualification of ERISA-covered pension and welfare plans. Rob’s clients include the largest and highest-profile U.S. media and entertainment industry clients, as well as a broad range of Fortune 500 companies.

In the multiemployer context, he serves as counsel to the boards of trustees of a number of large and small funds and frequently assists clients in addressing issues related to the funding of defined benefit pension plans, including zone status, benefit suspensions, special financial assistance and withdrawal liability. He also advises these clients on healthcare compliance, cybersecurity and government investigations. In addition, his practice includes advising corporate clients on their responsibilities related to multiemployer plans, with particular expertise on the impact of multiemployer and collectively bargained plans in corporate transactions.

Rob has extensive experience advising corporate clients regarding general compliance issues and fiduciary compliance matters, including plan asset and prohibited transaction issues. He also has addressed a myriad of issues related to complex plan investments, including negotiation of separately managed and collective investment vehicles for both traditional and alternative investments such as hedge funds, private equity funds and fund-of-funds vehicles.

Rob is described in Chambers USA as “incredibly smart and creative, and a really effective, zealous advocate” who “adroitly communicates complicated ERISA matters to clients in understandable language and well-timed levity.”  He is a widely sought after speaker on topics related to employee benefits, fiduciary, cybersecurity and government investigations and speaks each year at the annual conference and various other conferences sponsored by the International Foundation of Employee Benefit Plans, the largest educational organization in the employee benefits industry. Rob currently serves as one of the nine Advisory Directors on the Board of Directors of the International Foundation.