Administrative Services Only (ASO)
An administrative services only (ASO) plan is essentially a self-funded plan. The employer is exclusively liable for all financial (claims and related expenses) and legal aspects of the group benefits plan; hence, there is no insurance under an ASO plan. In a true self-funded plan, the employer would also be responsible for the administration of the plan; however, an employer generally does not have trained personnel to handle the claims adjudication and payment process and, therefore, enters into an ASO agreement with an insurer to administer the plan. Nevertheless, there is still no element of insurance in this type of arrangement since the insurer simply acts as the administrator of the plan.
An ASO arrangement is typically offered on health care, dental care, and short-term disability and less frequently on long-term disability benefits. Because of the high degree of risk associated with the life benefit (high claim severity or large coverage amounts) and the taxability to the beneficiary of a death benefit in excess of $10,000, it is rare for employers to provide life insurance on an ASO basis.
At Regency, we offer ASO administration services handling claim adjudication, billing, and payment processes. You may refer to our Resources page to review a list of allowable expenses defined in the Canada Federal Income Tax Act.
An ASO plan can be billed in advance through monthly deposit levels or billing rates common to a traditional insured plan. The advantage to the employer is that funding of the plan is level throughout the year, which is why plans funded in this manner are sometimes called budget ASO plans.
An ASO plan can also be funded through one of several billed-in-arrears arrangements. Because payments are based on actual paid claims and costs, the employer faces potential fluctuations in cash flow from periodic fluctuations in claims. Described briefly below are two billed-in-arrears arrangements:
1. monthly billed in arrears (non-automatic fund transfers); and
2. automatic fund transfers (AFT).
Monthly billed in arrears (non-automatic fund transfers): Claims and expenses are reimbursed through a cheque payment in the following month. There may or may not be an advance deposit or operating fund from which the administrator (insurer) can pay claims. Some administrators may insist on having an operating fund to facilitate claims payments.
Automatic fund transfers (AFT): Billing in arrears can be done through automatic fund transfers from the employer's account on the basis of cheques issued (most common basis) and costs, or cheques cashed (rarely offered by insurers) and costs. Reimbursement is typically done on a daily or monthly basis. For plans that are billed in arrears on a cheques-issued basis, daily reimbursement can be done with or without a claims lag (typically two to five days). One advantage of an AFT cheques-issued arrangement on a daily reimbursement basis is the zero cash flow - hence the term zero-based accounting.
Premium Rate Determination
A renewal rating is not necessary for ASO plans that are billed in arrears. For plans that are billed in advance through level monthly deposits or unit rates, renewal rates are determined using the experience-rated approach. Insurers are more flexible in their renewal rate requirements for ASO plans because they are not at risk. However, although the insurer assumes no liability for the plan, potential losses from the employer's inability to repay any plan deficits can be minimized by setting deposits at a level that will support plan costs.
An ASO plan falls into the category of a refund or retention accounting plan in that an annual financial statement is prepared to reconcile deposits, claim payments, administrative expenses, applicable taxes, and cash flow interest. There is greater leeway in the treatment of plan surpluses or deficits because the insurer has no financial liability - the employer is fully liable for any plan deficits. Plan surpluses are credited with interest and may be refunded in full to the employer or carried forward as a positive balance into the next accounting period at the discretion of the employer. When an ASO plan (usually budget ASO or non-automatic fund transfer plans) is in a deficit position, the insurer faces a potential risk only in the event of bankruptcy of the employer.
This risk is related to the inability to recover funds advanced by the insurer to pay claims and is not related to liability
Liability of Risk
There is no element of insurance in an ASO arrangement since this type of plan is essentially self funded or self-insured. The employer bears the full liability for all claims incurred under the group benefits plan and assumes the legal responsibility for claims litigation. Under an insured plan, any lawsuits would be directed against the insurer; under an ASO plan, lawsuits instigated by unsatisfied claimants would be directed at the employer.