Companies may provide their employees with a retirement plan. Usually, there are two options from which they can choose. These include the defined-benefit plans and defined-contribution plans. Both of these have their advantages and disadvantages. In essence, both plans provide employees with income after they retire. This income comes in the form of pension payments.
While most companies offer these plans, an obligation to do so may not exist. Nonetheless, companies may provide these plans to their employees. These plans fall under employer-sponsored plans. In some cases, companies may manage their plans through internal management. However, some companies may choose to outsource the process to allow experts to oversee it.
When companies outsource the management of their sponsored plans, they must choose a vendor. This vendor will oversee the plan in exchange for a fee. Both parties will enter into an agreement, which is critical to continue the relationship. This contract falls under administrative services only. Before understanding the term, it is crucial to consider what employer-sponsored plans are.
What is an Employer-Sponsored Plan?
An employer-sponsored plan is a type of benefit plan that companies offer to their employees. This plan usually comes at a low or no cost to the employee. Instead, the underlying company oversees its financial aspects. Usually, employer-sponsored plans include 401(k)s or HSAs, which cover various services. For example, these may consist of retirement savings and healthcare.
An employer-sponsored plan serves as a benefit provided to employees in exchange for the services they provide. These plans help ensure employees of their future income after retirement. Employer-sponsored plans may fall under both defined benefit and defined contribution plans. Regardless of the form, both can be significantly beneficial to employees and employers.
Employer-sponsored plans are prevalent among most companies. For the employee, the primary benefit that these plans provide is post-retirement income. While it may seem disadvantageous for the employer, it can also benefit them. Usually, these benefits come in the form of employer satisfaction. However, they may also involve tax benefits for the company.
Based on the type of sponsored plan an employer provides, the benefits and risks may differ. Usually, defined benefit plans guarantee a specific retirement benefit amount for every employee. Due to this feature, these plans are riskier to the employer. In contrast, defined contribution plans may offer varied income in the future. Therefore, they can increase the employees’ risks.
Overall, employer-sponsored plans are retirement plans offered by companies or employers. These plans may fall into two categories, defined plan, and defined benefit. Both of these have their advantages and can vary in their risks. However, employer-sponsored plans are beneficial for both parties in general. These plans may also require management, which is where the term administrative services only come into play.
What is Administrative Services Only?
Administrative services only (ASO) is a term used to describe the agreement between companies and vendors. This contract covers the administration of an employee benefit plan. In some cases, companies may choose to administer their employer-sponsored plans through internal management. However, they may also hire an outside vendor to do so to transfer the administrative burden.
In some cases, companies may choose to transfer the administration to obtain expert services. For example, a company may hire an insurance company to overlook its employee health plan. However, this contract only transfers the administrative tasks associated with the employee benefit plan. It does not cover the claims that may come with it. The company still assumes responsibility for those.
Therefore, with administrative services only, companies fund their own employee benefit plans. However, they purchase administrative services from another vendor. These contracts are prevalent for health plans that companies offer. With these plans, companies fund their specific health plan. However, they transfer the administration to an outside insurer.
Administrative services only arrangements may apply to specific cases. Some people may confuse this process with the transfer of the plan to an external party. However, as the name suggests, it only covers the administration. Usually, employers only use it for employer-sponsored health benefits instead of purchasing health insurance for their workers. With these plans, the employer still handles the claim but doesn’t cover the administrative tasks.
Overall, administrative services only is a contract between a company and a vendor. With this contract, the company transfers the administration of an employer-sponsored plan. However, it still covers the claims that relate to their plan. This contract only applies to specific cases. In most circumstances, companies use administrative services only to transfer the administrative burden of health plans to insurers.
What is the Difference Between Traditional Administrator and Administrative Services Only?
Administrative services only differ from traditional administrators in various regards. With the traditional approach, the insurance premiums get assessed annually. Therefore, it takes a reactive approach for some employers. However, administrative services only allow for a more proactive method for handling health plans. It provides them with the option to prevent any potential abuse of the benefits.
With the traditional insurance administrator, insurance companies administer employees’ claims. However, this process falls under the contracted health and insurance premiums. In contracts, insurance companies only offer paid administrative support with administrative services only. It does not cover the financial responsibility of the health and insurance claims.
Similarly, the insurance reserve increases next year if the spending exceeds the anticipated figure. However, it does not decrease the insurance premiums when the opposite applies. This concept applies to the traditional administrator. However, the employer bears the deficit when the costs exceed the budget with administrative services only. On the other hand, if the opposite applies, it results in a surplus, a direct benefit to the employer.
With the traditional administrator approach, companies get stuck with a single insurance carrier. Due to the reliance on those carriers, it becomes challenging to move or negotiate the contract. However, the opposite applies to administrative services only. Companies can choose from various vendors, providing them with more control over the process.
What Are the Advantages and Disadvantages of Administrative Services Only?
Administrative services only can have several advantages for companies. The most prominent of those include the lower costs associated with the process. By outsourcing the administrative burdens related to their plans, companies can significantly lower their costs. On top of that, they can also get access to various vendors, which are experts in the process.
Administrative services only also provide companies with greater flexibility when it comes to designing their benefits. Due to this, they also get increased control over the process. In addition to that, it can provide better cash flows compared to the traditional methods. Furthermore, companies can also get a surplus, which they can keep. This surplus is not available in the traditional administrative option.
Despite its many advantages, administrative services only can have some disadvantages as well. Usually, these plans come with substantial financial risks. Similarly, the company assumes full legal responsibility for processing any requests. The risks associated with it can depend on the size and number of claims that companies receive.
On top of that, the administrative services only plan only apply to specific situations or cases. For example, they are convenient for benefits such as extended health or dental care. However, they may not apply to high life insurance plans. Ultimately, it depends on the company to assess its risks against the benefits to evaluate whether these plans are worth it.
Administrative services only involve a company transferring the administration of their employee benefit plans. This process includes finding a suitable vendor that then assumes the responsibility for administering the benefit plan. Usually, it can have several advantages for the company. However, it may also come with certain disadvantages, as mentioned above.