Actuarial equivalent refers to a position where two or more future cash payments have the same current value based on the appropriate estimate made for the purposes of calculating benefits. Actuarial equivalent is calculated on the basis of life expectancy, return on investments, interest rates, and compensation. By calculating possible payout of benefits, a plan sponsor can decide about the premium to be charged and about the amount which an insurance company should set aside as readily available cash or liquid securities. It would give out the sum of money which is the probable loss from a particular risk.
Actuarial equivalent is generally used to find out whether resulting values of two benefits plans are sufficiently close. For example, actuarial equivalence measurements can be used to compare one specific benefit plan to a standard plan, to see whether the plan is comparable in terms of coverage. Actuarial equivalence calculations are done on an average basis, not on an individual basis.
Under medicare actuarial equivalent refers to the prescription drug plan offered by a plan sponsor which is similar or better than the medicare part D prescription drug plan.