These terms and definitions are commonly used in conversations about health reform and may be different from the terms and definitions for a specific benefit plan. Employee benefits are a complex and rapidly changing area. Refer to standard texts and reference works for more details and most current information on the terms presented. Seek professional assistance in making decisions regarding benefits planning and administration. Provided for informational purposes only.

Term of the Week

Deductible: These terms and definitions are commonly used in conversations about health reform and may be different from the terms and definitions for a specific benefit plan. Employee benefits are a complex and rapidly changing area. Refer to standard texts and reference works for more details and most current information on the terms presented. Seek professional assistance in making decisions regarding benefits planning and administration. Provided for informational purposes only.


Adjusted Community Rating (ACR): Adjusted (or modified) community rating laws generally do not allow health status or claims experience to be used when establishing the premiums for a particular insured group or individual, as applicable. The Affordable Care Act permits premium adjustments in the individual and small group market for age, family size, geographic location and tobacco usage.

Annual Limit: Maximum benefits a person may get from a health benefit plan in a plan year. Under the Affordable Care Act, annual and lifetime dollar limits on certain “essential health benefits” are prohibited.

Average Total Number of Employees (ATNE): the average number of employees employed by the company during the preceding calendar year. An employee is typically any person for whom the company issues a W-2, regardless of full-time, part-time or seasonal status or whether or not they have medical coverage.

To calculate the annual average, add all the monthly employee totals together, then divide by the number of months you were in business last year (usually 12 months). When calculating the average, consider all months of the previous calendar year regardless of whether you had insurance coverage. Use the number of employees at the end of the month as the “monthly value” to calculate the year average. Use whole numbers only (no decimals, fractions or ranges).



Benefit Package: specific goods, services and/or payments provided by a benefit plan or insurance contract. For health insurance this typically covers health services, such as physician visits, hospitalizations, and prescription drugs.



Certificate of Coverage: A written document provided to members that sets forth the terms of their health plan. It explains (among other things) coverage, member cost share obligations, appeal rights and important enrollment information.

Coinsurance: In medical insurance a percentage of each claim that the insured will bear. The cost of coverage is shared at a specific ratio – often 80% by the insurer and 20% by the insured after the deductible is met.

Consumer-Driven Health Plans: There is no single definition for consumer-driven healthcare. In the case of health insurance plans, these plans seek to increase consumer awareness about health care costs and provide incentives for consumers to consider costs when making health care decisions. These plans often combine a high-deductible insurance plan with a pre-funded savings account controlled by the consumer. There are two types of savings accounts: health savings accounts (HSAs) and health reimbursement arrangements (HRAs).

Copayment: a cost-sharing mechanism in group insurance plans where the insured pays a specified fixed dollar amount of incurred medical expenses and the insurer pays the remainder.

Cost-Sharing: Arrangement in which some benefit costs are paid by the insured. In addition to paying premiums (or a portion of) cost-sharing techniques include copayments, coinsurance and annual deductibles.



Deductible: The dollar amount that an insured must pay for health care services each year before the insurer begins payment. The deductible is usually a flat amount.



Effective Date: Date at which an insurance policy goes into force, typically the first day of a month.

Employee Retirement Income Security Act of 1974 (ERISA): Federal law that sets the minimum standards for protection of individuals in voluntary welfare benefit plans including health benefit plans. The law protects individuals by requiring the disclosure to individuals of financial and other information concerning the plan; by establishing standards of conduct for plan fiduciaries; and by providing for appropriate remedies and access to the federal courts.

Employer Mandate: Employers meeting size or revenue thresholds are required to offer minimum essential health benefit packages or pay an Employer Shared Responsibility Payment (ESRP) for a portion of the cost of those benefits for use in the Exchanges.

Essential Health Benefits: A set of 10 benefit categories including hospitalization, outpatient services, emergency care, prescription drugs, maternity care, preventive services and other benefits. The only requirement for “essential health benefits” is that if they are included in the plan, they may not be subject to a lifetime or annual dollar limit.

Exchange, Health Benefit Exchange or Health Insurance Exchange: All states must establish and operate a health insurance marketplace or use the marketplace created by the federal government to facilitate the purchase of individual health insurance through qualified health plans; and provide for the Small Business Health Options Program (SHOP) designed to assist qualified small employers.



Flexible Spending Account (FSA): Account that reimburses employees for expenses incurred for certain tax qualified benefits. Three types of accounts can be set up: medical care, dependent care and adoption assistance. Reimbursements from and FSA are not taxed. All money must be spent in the same calendar year with the exception of $500 that can be rolled over.

Fully Insured: Having sufficient coverage from an insurance company for all risk. For employer health insurance, Plan Sponsors who provide fully insured coverage make monthly premium payments in exchange for the issuance of a fully insured group health benefits policy from a licensed insurance carrier. The insurance carrier in turn assumes the full risk for the actual cost of medical expenses incurred by employees and beneficiaries covered under the group policy. Fully insured accounts are subject to both state and federal mandates.



Grandfathered Plan: A health plan that was in place March 23, 2010, is exempt from complying with some parts of the health reform law, so long as the plan does not make certain changes (such as eliminating or reducing benefits, increasing cost-sharing, or reducing the employer contribution toward the premium). Once a health plan makes such a change, it becomes subject to other health reform provisions.



Health Reimbursement Arrangement (HRA): An employer-sponsored and employer-funded account that is tax-exempt and can be used to pay for qualified health expenses. HRAs are usually paired with a high-deductible health plan and are funded solely by employer contributions. Money remaining in the account at year-end can be carried over and used to cover future medical expenses, but it is not portable if the employee changes employers.

Health Savings Account (HSA): A tax-exempt savings account that can be used to pay for qualified medical expenses and, in certain situations, premiums for long term-care and Medicare. Individuals can obtain HSAs from most financial institutions, or through their employer. Both employers and employees can contribute to the plan. To open an HSA, an individual must have health coverage under an HSA-qualified high-deductible health plan.

Hospital Indemnity Coverage: coverage that provides a pre-determined, fixed benefit or daily indemnity for contingencies based on a stay at a hospital or intensive care facility. These plans do not meet the minimum value requirements of the Employer Shared Responsibility Payment.



Individual Mandate: A requirement that most individuals obtain health insurance or pay a penalty beginning in 2014. Massachusetts was the first state to impose an individual mandate that all adults have health insurance.



Lifetime Benefit Maximum: Maximum benefits a person may get from a health benefit plan in a lifetime. After a lifetime limit is reached, a plan no longer pays for covered services. The Affordable Care Act prohibits health plans from putting a lifetime dollar limit on most benefits received.

Long-Term Care: Variety of services both medical and nonmedical needed for an individual with chronic health issues who need assistance with daily activities. This can be provided in the home, such as home health and personal care, as well as services provided in institutional settings such as nursing homes.



Mandated Benefits: A state or federal law that requires insurance provide coverage for certain benefits, treatment or services.

Medicaid: Policies issued in association with the Federal/State entitlement program created by Title XIX of the Social Security Act of 1965 that pays for medical assistance for certain individuals and families with low incomes and resources.

Medicare: A state assistance program, passed under Title XVIII of the Social Security Amendments of 1965, to provide hospital and medical expense insurance to those over 65 years of age and to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other special criteria such as end-stage renal disease.



Out-of-Pocket Costs: Costs paid for by the individual, such as deductibles, copayments, and coinsurance. Out-of-pocket costs do not include premium costs.

Out-of-Pocket Maximum: The highest amount a health plan specifies a plan participant must pay for deductibles, copays, coinsurance and similar charges. The Affordable Care Act specifies the maximum cost-sharing amount for a health insurance plan to still meet essential health benefits.



Plan Sponsor: Entity that establishes and maintains a benefit plan. The sponsor may be a (1) single employer; (2) an employee organization or (3) an association, committee, joint board of trustees or other similar group of representatives of the entities involved.

Policy Period: Time period during which insurance coverage is in effect.

Pre-existing Condition: A health condition (other than pregnancy) that was diagnosed and/or treated within the six months prior to when the member enrolled in the health benefit plan. The health reform law prohibits the denial of coverage or charging higher premiums due to a pre-existing condition

Preferred Provider Organization (PPO): A type of managed care organization that provides health care coverage through a network of providers. Plan members typically pay higher costs when they seek care from out-of-network providers.

Premium: The fee a policyholder agrees to pay an insurance company for an insurance policy. Health insurance is typically paid on a monthly basis. The cost of the premium may be shared between employers or government purchasers, and individuals.

Premium Subsidies or Premium Tax Credit: A reduction in federal income taxes to help low-income persons purchase coverage through the public health exchanges. Qualified individuals can choose to have the credit applied in advance to their monthly premium. If the amount advanced is less than the credit calculated at the end of the year, the difference is claimed on a person’s federal income tax return. If the advance is greater than the end of year credit calculation, the difference must be repaid with the person’s income tax return. People offered employer sponsored coverage deemed affordable and providing minimum value are not eligible for this tax credit. Individuals who qualify typically have incomes between 133 and 400 percent of the federal poverty level.

Preventive Care Services: Health care services used in the prevention or early detection of disease that are performed on a patient without symptoms or abnormal study results. The Affordable Care Act requires certain health plans to provide coverage without member cost-sharing for certain preventive services.

Primary Care Provider: A provider, usually a physician, specializing in internal medicine, family practice, or pediatrics, who is responsible for providing primary care and coordinating other necessary health care services for patients.



Qualified Health Plan: Insurance plans offered through a public Health Insurance Exchange must be certified indicating they meet a minimum benchmark of state and federal benefits (i.e., essential health benefits) under the health reform law.



Section 125 Plan: Otherwise known as a “cafeteria plan,” this is offered pursuant to Section 125 of the Internal Revenue Code. It allows an employer to offer employees the choice between a taxable benefit (such as cash) and one or more nontaxable benefits.

Self-Funded Plan: The employer assumes the financial responsibility of health care benefits for its employees in a self-insured or self-funded plan. Employer-sponsored, self-insured plans typically contract with a third-party administrator to provide administrative services for the plan.

Small Business Tax Credit: Employers that have fewer than 25 full-time workers with average wages of less than $50,000 are offered a tax credit equal to 50% to help provide health coverage to their employees.



Wellness Plan/Program: An employer program to help improve health and prevent disease. The goals of these programs include: reducing health care costs, maintaining and improving employee health and productivity, and reducing absenteeism due to illness.