Projection of Plan Costs and Funding Needed

The plan is accounted for on a prospective basis. Expenditures are projected before the plan year begins, and this forms a basis upon which decisions are made regarding the level of funding from both the company and the employee that will be necessary during the plan year. A set dollar amount is contributed by the company, as well as a defined contribution per eligible employee. This amount is usually determined prior to the beginning of the fiscal year. The goal is to ensure that the company pays for 80% of the net annual healthcare costs, leaving the remaining 20% to the employees.
Setting of Employee Charges
Rates for employees are established before each plan year begins based on a variety of factors, including the following:

  • Projected net costs
  • Allocated Company funding
  • The projected number of employees included
  • The projected enrollment in each plan option available (deluxe, standard, or opt-out)
    Other considerations also impact rate decisions, including health plans either over- or under-recoveries from previous years; the importance of maintaining the stability of employees’ rates; the desire to maintain rates that compare to their industry average; and, lastly, the need to maintain the rate structure’s integrity between the plan options.
    Actual Costs and Funding Received
    During each plan year, costs are incurred as the plan is used. Bagan Inc. provides funding, alongside employees, during each plan year based on previously established rates. If costs exceed available funds for that year, the company will advance the plan additional funding without any additional interest. The account would be later reconciled to restore any payments.
    Healthcare Plan Balance (Over/Under-Recoveries)
    After the plan year is concluded, actual plan costs are accounted for, and funding is received. If costs exceed funding, this is called an under-recovery. As mentioned previously, the plan would be advanced in such an instance.
    Conversely, if funding exceeds costs, this results in an over-recovery. First and foremost, this over-recovery is used to offset under-recovery from previous years. Any balance remaining is carried forward into future periods to offset prospective costs to smooth or moderate employee’s charges. As before, when a health plan has an over-recovery, no interest is paid.
    Because plan rates are set using projections, there is always either an over- or under-recovery for each year. Despite efforts to make accurate projections, actual healthcare costs always vary. However, amounts contributed by companies for healthcare, and amounts collected from employees, must always be used to pay for plan costs, even if not for the current year.
    Communicating on Healthcare Accounting and Balance
    Bagan Inc’s Human Resources department presents and reports on healthcare costs and funding on a regular basis throughout each year. Regularly updated information on these costs and company accounting practices are subjects of interest to many employees. Further, the company recognizes that having well-informed employees in this healthcare plan is advantageous, because it provides useful feedback.

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