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Workers Comp Audits

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Insurance Audits- How to Prepare?
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Workers Compensation Audit

A workers compensation premium audit may be performed after each policy period in order to verify payroll, class codes, and sub-contractor exposure.

Workers compensation Insurance Audit Tips

What is a workers comp audit?

A workers comp audit is conducted at an insurance company's discretion.  It may be done by phone, mail, or in person with the Auditor.  Work comp audits determine if the payroll and class codes quoted at inception accurately reflect the payroll and scope of work during the policy period.  Audits also ensure that sub-contractors had their own coverage in place.  If not, you may be charged for their exposure on your policy.

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A work comp audit is the examination of the books or records of a policyholder, or insured, to determine the accuracy of the estimated policy premium. The actual premium basis and exposure are reconciled after the policy expiration date against the estimates used to establish the actual earned premium for the policy. A year-end final audit is really a verification of the exposure of a policyholder to determine the final premium to be charged since the original quote was based on estimated payroll only.

It is worth noting that Pay As You Go Workers Compensation policies help reduce exposure to large audit balances because the premiums are based on actual payroll and reported/paid in real-time, verses traditional estimated payroll programs.

Audits are almost always conducted after each policy period ends or expires.  After the audit has been completed, the insurance carrier will send a Final Audit Statement to the policy holder.  This statement will indicate if any additional premium is owed by the insured or if any credits need to be returned or applied to the next policy. Typically, these credits or debits are caused by payroll adjustments made by the auditor when conducting the year-end audit.


Records You May Need for a Work Comp Audit

When preparing for your workers compensation audit you should plan to make available to the auditor only those items they ask for. There is no reason to give them or volunteer more information than they ask for. Remember, the quicker an auditor can finish his job and move onto another audit, the better it is for you and for them. Here's some of the common reports and documents employers might need for a fast and smooth premium audit:

Payroll Records

» Payroll journal and summary

» Your check boo (if its your only means of keeping records

» Federal Tax Report- 941's that cover the period

» State Unemployment Tax reports or individual earnings records

» All overtime payroll records (reduced rates)

Employee Records

» Detailed explanation of job duties of each employee (if available)

» Hours, days, and weeks worked annually

Payment and Cash Disbursement Records

» Payments to sub-contractors

» Material purchases

» Casual labor payments

Certificates of Insurance

» For all sub-contractors used during the policy period

» For and independent contractors used

Detailed Description of Your Business Operation

» Used to justify your workers comp classification codes

Experience Modification Worksheets

» Used to verify Auditor applies correct MOD to policy period


Types of Workers Compensation Audits Performed

There are two types of workers compensation audits performed. A physical audit and A voluntary audit. Whether an insurance company performs a physical or voluntary workers compensation audit will depend upon the type and nature of your business operations and the size of the premium. More complicated businesses and larger premium sizes will usually require a physical audit rather than a voluntary audit:

Physical Workers Compensation Audit

This type of audit is performed at your place of business typically within 60 days after the expiration of your workers compensation policy. The auditor will notify you by mail or phone and schedule the audit appointment. Keep in mind that the auditor is on a time schedule. Most insurance carriers require them to return the completed audit within a 30 day time period once assigned. If the audit is not completed within the time frame given, the auditor must return it to the insurance company marked delinquent. This may result in a larger than necessary audit bill by the carrier and may not be based on any accurate data.

Voluntary Workers Compensation Audit

Generally, a voluntary audit form is mailed by your insurance company within 30 days after the expiration of your insurance policy. This form should be completed and returned to the insurance company as soon as possible. The form usually shows the classifications as shown on your policy and asks for your actual payroll exposures for each class. These forms are basic but can be confusing for someone who has not complete one before. The form may also request that you return other tax reports or documents along with the audit form.

If you have any questions about voluntary audit forms it is in your best interest to contact the insurance company or agent and ask them how to complete the form. The information you send back is what the insurance company will use for your audited payroll. It is important that you understand how the information you send back will affect the audit outcome and policy premium.

It is also very important that the audit be completed and submitted to the insurance company in a timely manner. If it is a physical audit, do everything you can, within reason, to comply with requests the auditor makes. If you've been asked to complete a voluntary audit do your best to fully complete the forms and ask for help if you need clarification on any item being requested.


Workers Compensation Premium Audit Tips

Separate and summarize employee overtime paid to employees by job classification or class code.

» Premium on overtime wages are charged at a reduced rate.

Get current certificates of insurance for all subcontractors you paid during the policy period.

» Make sure the certificate proves the subcontractor had work comp during the time of service.

» If you can't provide a work comp certificate for the sub you will be charged premium on that class code.

Separate employee payroll by class code

» Employee payroll can often be divided over different class codes if they perform multiple job duties. Accurate payroll records must be kept and reflect hours and work performed before a multi-class separation will be applied. This is called "Payroll Class Separation". Without adequate records, the entire payroll for the employee will be placed in the highest rated classification code.

Make the Auditors' job easy.

» Be prepared and have complete and accurate records available for review.

» Do not volunteer too much information. Just have straightforward and direct answers for the auditor's questions.

» Make sure an owner or a person knowledgeable about the business is available to meet with the Auditor.

It is always a good idea to engage the auditor during the audit process and review any worksheets they prepare. Do not sign off on incomplete audit worksheets. Ask questions about anything that may not make sense to you. Finally, ask to make a copy of the audit worksheet they prepare. It is not uncommon for auditors to make mistakes on the audit worksheets. Remember, they work for the carrier and most mistakes are in favor of the insurance companies.

Audits are a contractual obligation within the workers compensation insurance policy. It is common practice for carriers to add an additional 25% to all estimated payroll figures when businesses fail to comply during the audit process. It is in your best interest to have a reasonable understanding of your work comp class codes, payroll, and subcontractor payments prior to any physical or voluntary audit.



Frequently Asked Questions- Workers' Comp Audits:

What Records do I need for a premium audit?

Common records include payroll and disbursement journals, general ledger, cash receipt journals, checkbooks, 941's, state unemployment wage reports, 1099's, 1040c (Schedule C), 1120, 1065, etc.

Are holiday, vacation, sick time wages and housing allowances included in the premium calculation

Yes. There are included as wages in the calculation.

How are overtime wages handled in the audit premium calculation?

O.T. Wages are included as payroll at the employees regular pay rate if they can be separated via a report. Overtime wages are included at two-thirds of the amount paid. * Not applicable in every state.

When can an employee's payroll be split among two or more class codes?

Employee payroll should be assigned to the basic classification that best describes the business of the employer. It is the overall business that is classified as opposed to each employee or job duty. However, the payroll for an employee can be split if two or more classifications can be applied to your business/employee, and you maintain a payroll record breakdown for the employee by job classification. The following class codes can't be split for one employee: 8810- clerical, 8742- sales or messenger, 8748- auto sales person, and 8871- clerical telecommuter. Estimated or percentage allocation of payroll is not acceptable.

Can corporate officers be excluded from coverage?

Some states permit officers to elect exclude from coverage. See state specific information page. Any required exclusion forms need to be signed and given to the carrier prior to policy inception.

What if my legal status or ownership changes during the policy term?

This will more than likely impact your work comp coverage and premium. You will likely need to complete an ERM-14 Form to determine the impact. Advise your agent or carrier immediately.

What qualifies as an independent contractor?

Generally speaking, it is one who makes a business of providing a service for a predetermined price to several different customers, under his or her own terms. Maintain copies of contracts and invoices showing a breakdown of labor and materials. Keep copies of any business cards and certificates.

Will I be charged premium for independent Contractors (subcontractors)?

You will be liable for premium unless you have valid certificates of workers' compensation insurance. Always ask for and get a valid work comp certificate prior to them starting a job.

What is a valid certificate of workers' compensation insurance?

A valid certificate or "cert" identifies a policy which is effective during your same policy period. It shows the independent contractor or subcontractor as the "insured" and shows your company as the Certificate Holder.



Common Mistakes Made During Workers Compensation Audits

Auditor uses the wrong class codes for one or more employees.

Auditor applies the wrong experience mod when calculating your audit premium.

Workers compensation policy credits given by the carrier at the beginning of the policy are not showing up on audit.

You are being charged for sub-contractor payments even though you have a valid certificate.

The original manual rates quoted to you are not the same as the rates on the audit.

Incorrect payroll figures are used on when calculating the audit.

Owners and officer were not excluded from the audit when they were excluded on the policy.

You had an employee in multiple workers compensation class codes but the payroll was not separated on the audit.


Workers Compensation Audit Terms

Premiums Earned

Portion of written premiums that are applicable to the expired portion of the time for which the insurance was in effect.

When used as an accounting term, "premiums earned" describes the premiums written during a period plus the unearned premiums at the beginning of the period less the unearned premiums at the end of the period.

Payroll

The wages paid by an employer in a given state and worker comp classification code. In Workers Compensation, an insured's exposure to hazard is usually measured in terms of its payroll. Premium is calculated per $100.00 in wages.

Payroll Audit

An examination of the insured's payroll and tax records by a representative of the insurer to determine the premium due on a policy for which payroll is the basis.

Premium Discount

Refers to a percentage discount based on the size of the computed premium, with larger premiums subject to larger percentage discounts, recognizing relatively less insurer expense in issuing and servicing large policies. The discount is designed to distribute the cost of Workers Compensation insurance equitably among risks of all sizes, so that larger policies pay no more than their fair share of loss costs and insurance company expenses.




Help With Insurance Audits?

Our agency provides knowledgeable staff who assist our customers with audits on a daily basis.  It's common place for insurance companies and auditors to make mistakes when conducting a workers compensation audit.  Contact one of our Audit Specialists today for a free audit review on your policy.  We understand the formal audit dispute process and are always happy to work with customers and ensure they never pay too much on an insurance audit.




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Workers Compensation Experts Managing the Audit Process.

The simple fact is that many workers comp audits are inaccurate, costing business owner hundreds and thousands of additional dollars each year. The only way to ensure your audit is calculated correctly is to understand the process or have a trusted agency do a review.

We want to be your workers compensation agency. Shop your workmans compensation insurance online or give us a call today at 888-611-7467. We'll review your current or prior audits and rates with no obligations.

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