By Neil Wallace
Retention or Refund Accounting is simply another method of funding experienced rated benefits that allows the plan sponsor to participate in the financial results of the plan. In terms of the risk spectrum, retention accounting is the step between being fully insured and Administrative Services Only (ASO). The major advantage to this method is that you cannot over-fund the plan. Any over-funding that may occur is captured based on the financial agreement and returned to the plan sponsor in the form of a declared “surplus.” Alternatively, if a plan’s claims experience is unfavourable, the employer would be required to pay back deficits either making a lump sum payment or it may be built into renewal rates for the upcoming year.
Each carrier sets their required minimum level of experience-rated premium before they will offer retention accounting. Generally, $150,000 of annual EHC and dental premium is the minimum collected prior to a carrier accepting a risk for refund accounting. Each carrier also sets the level of reserve required for each of the experience-rated benefits. Because employers do not have any legal requirement to pay deficits, and are able to terminate the plan at any time leaving any deficit in the hands of the insurer, first year reserves must be funded and reserves are adjusted annually based on the claims results of the previous year.
It is very common for an employer contemplating self insurance to often test the waters, so to speak , with a retention based model first.