In our previous post, we gave a general overview of what Workers Comp insurance is, and ran through a couple of examples of how the policy might be set up. We really limited that to some very general information. Today, we’ll start getting into more detail by going over one specific part of every worker's comp policy – the Workers Compensation Audit.
What is the workers' compensation audit and what is its purpose?
First of all, take a breath. The word “audit” has a pretty negative connotation and can be taken to mean an intrusive, difficult, and adversarial process. That’s not typically what the Workers Comp Audit is, and definitely not what it should be. Because your Workers Comp policy premium is based upon what your employees are doing and what their payroll is, the insurance company verifies this information via an audit, and it’s usually a fair and straightforward process.
The Audit can come in several forms. The most common form for small businesses is a form the insurance carrier sends you, either via mail, email or through a web portal. Many carriers use a Third Party to conduct the audit, so it would be common for you to work with a representative from that third-party company.
Depending on the carrier, the size of your business or the industry you work in, an in-person audit may be more common. In this instance, the auditor should contact you to set up an appointment and let you know ahead of time what information you should have on hand.
Preparing for the Workers Compensation Audit
There are a couple of things that you should have ready for the audit. These include:
- Payroll Reports from every check date between your policy’s effective dates.
- Summary reports are the best way to go – they have the same information and help reduce the amount of paperwork.
- Quarterly 941 Reports from the 4 quarters closest to your policy period
- Quarterly UC-2 Reports from the 4 quarters closest to your policy period
- Gross Receipts (not all carriers ask for this, but it is becoming a more common practice)
If you don’t have these reports on hand, you can usually get them pretty easily from your payroll company.
An audit can be completed with this information for many businesses; however, there is additional information needed if you use subcontractors or 1099 independent contractors.
Subcontractors & Certificates of Insurance
Almost every audit asks if you use any subcontractors or 1099 independent contractors. If you don’t, simply answer no and that’s all that’s typically needed. If you do ever use subcontractors, make sure you have Certificates of Insurance that show they had their own Workers Comp coverage at the time they worked for you.
Requirements to Complete and Penalties for Non-Compliance
The Audit is a requirement of your Workers Comp policy. This is a policy condition and there’s no way around not doing it. Even if you’re enrolled in a Payroll Billing program (more on this below), the audit is still required.
If you don’t complete the audit, the first step the carrier takes will be to “estimate” the audit. The “estimated” audit will typically assume that you had twice the amount of payroll you had originally estimated, and you’ll be charged the premium associated with that payroll increase. If that premium isn’t paid, the carrier can then cancel your coverage.
Workers Compensation Audit Results
Once an audit is completed, you’ll receive a statement from the carrier outlining the differences between what you paid during the year and the adjusted premium due, based on your actual payroll. Typically, if you have more payroll than originally estimated, there will be an additional premium due. The opposite holds true as well – if you had less payroll than originally estimated, there will typically be a premium refunded to you.
An exception to this would be if payroll were assigned to the wrong class code originally. For example, if you had all employees assigned to the “Office” class, but actually qualify for the “Salesperson” class, you can have payroll decrease and still be charged an additional premium because the Sales class has a higher rate.
All Workers Comp policies are subject to minimum premiums as determined by the classifications your employees qualify for. It doesn’t come up too often, but minimum premiums can prevent a refunded premium, even if you have less payroll than originally estimated.
Payroll Billing Program
One of the best ways to combat the uncertainty regarding your Workers Comp premium is to enroll in a Payroll Billing (aka Pay As You Go, aka PAYGO) program. This program coordinates your payroll company and your insurance carrier to accurately track payroll as it’s being reported. When it works perfectly, there is a negligible difference between the Workers Comp premium you pay and the final premium determined by audit.
Unfortunately, the staff Compensation Audit remains needed, even once listed in an exceedingly PAYGO program, however, it's typically easier to finish. We’ll move into a lot of details regarding the Payroll charge programs that are offered in another post.
