The premium you pay for Workers’ Compensation insurance at the beginning of a policy period is an estimate based on your projected payroll and operations (exposure). After the end of the policy period (usually 30-60 days later), a reconciliation audit is typically performed to compare your estimates to actual payrolls and classifications. You will either owe additional premium or receive a refund depending on the outcome of the audit. It is important to not only be as accurate as possible regarding your payroll and other factors that go into determining your Workers’ Comp premium but to also be well prepared in advance of an audit.
Top Workers’ Compensation Premiums Audit Issues
- Know what payroll can be excluded from premium charges. Overtime premium pay is the big example, but there are other components that make up compensation as well.
- Do not answer any questions about classifications from the auditor of which you aren’t 100% certain; only promise to write the questions down and respond in writing after consulting with the appropriate people in the organization and your Work Comp broker. The employee being interviewed by the auditor is often an individual in accounting who doesn’t have a perfect grasp of all the tasks employees perform and can make inaccurate statements that cause big problems in premium charges to unwind. The answer should always be, “Let me ask the right people and respond in writing to you, I don’t want to give you inaccurate information.”
- Know what reports and paperwork the auditor will be requesting in advance.
- How to avoid premium charges for sub-contractors.
Premium Audit Logistics
Payroll audits may take place remotely, by self-completed mail-in form or on-site. Larger organizations and high-hazard industries typically having their audits performed on their premises. Auditors may work for the insurer or be hired by a contracted third-party auditing firm.
What You Need to Get Audit-Prepared
A premium audit involves inspection of various accounting records and other documentation. Be sure you have everything organized and ready for the auditor:
- Employee specific payroll report (for the policy period) separating any overtime/premium pay in addition to sorting by Work Comp classification(s)
- Unemployment tax returns
- Form 1040 Schedule C (if sole proprietor)
- Tax reports (Federal Payroll 940s or 941s)
- General ledger, subcontractor ledgers and journal (or 1099s)
- Certificates of insurance for subcontractors (whose work becomes part of your work/service, not your third-party accountant or IT firm, for example)
- Corporate officer information/ownership % information and Included/Excluded from Work Comp status
- Additional materials upon auditor request
If you have employees that may fit into two or more classifications, contact your broker for the rules and record-keeping requirements as you may be available to split the employees’ time between multiple classifications. If they qualify, you need to be able to show exactly how many hours a given employee worked in the classifications down to any given day.
Insurance companies will take the final audit results and calculate the additional or return premium. They frequently will not “show their work,” only a final total. We recommend you always ask (or our process is to always ask on behalf of our clients) to fully review the audit. Don’t assume that the audit has been done correctly. We find error rates of well over 50%.
We have seen many instances of insurance companies moving classifications of employees without proper justification. Since employers don’t have access to the “rule book” they are frequently left to assume the insurance company is telling them the truth. Do not take their opinion as truth without having it verified by a third-party source with specialized knowledge.
The Value of an Experienced Broker
This system is about as easy to understand as IRS tax code. Additionally, classification codes are frequently modified or changed with much of the industry not keeping current. Not only do Work Comp specialty brokers advise you on accuracy of classifications you are using, but they can also provide you with “what if” analysis of premium consequences if you modify some of your employees’ job duties to reduce premium.
At Strong Tower, we understand the entire audit process, how the premium classification system works, and we help clients avoid audit trouble and minimize their cost. We can do the same for you. Just call us at 866-822-6774.
