Refund Accounting – Having Your Cake and Eating It Too!

Jun 16, 2014

The first time you’re presented with refund accounting, your initial thought might be, “This is too good to be true.” This financial funding arrangement for benefits plans is a hybrid of a fully insured arrangement and an administrative services only (ASO) plan. On the continuum of risk and reward, fully insured would be the lowest risk but with the least rewards (no participation in the financial gain or loss of the plan) whereas ASO would be the highest risk with the highest rewards (full financial responsibility of claims but lowest expenses).

Refund accounting lands in the middle because if it is set up properly, there is no financial risk to an employer. If the plan runs a deficit, an employer does not have to write a cheque to recuperate the loss. In partnership with the employer, the insurer builds a ‘rainy day fund’ from which losses can be written off over time. That rainy day fund is called the claims fluctuation reserve (CFR). However, similar to an ASO plan, if the plan runs well and results in surplus premium, this surplus may be refunded to the plan sponsor provided the CFR is fully funded. Who knew, that with group insurance, you could have your cake and eat it too?

With these advantages and benefits, why then is refund accounting not more popular? This arrangement may not be appropriate for all plans because if claims experience is erratic, an employer may not have an appetite to engage in this type of a financial partnership with the insurer. Patience is also a virtue, since the plan sponsor, insurer and benefits consultant must cooperate and work together to establish the CFR which can take one or two years.

It takes time to understand refund accounting and you may now have some questions regarding the mechanics of this arrangement or whether this is appropriate for you and your benefits plan. Due to the complexities of a refund accounting agreement, a benefits consultant needs to be experienced with this funding method to not only recommend it, but to also administer and monitor the agreement in the long run.

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