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What is a workers comp audit?
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
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
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.
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:
Payment and Cash Disbursement
Certificates of Insurance
Detailed Description of Your
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
and the size of the premium. More complicated businesses and larger premium sizes
will usually require a physical audit rather than a voluntary 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
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.
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
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
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.
It is always a good idea to engage the auditor during the audit process
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.
What Records do I need for a
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
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
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
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
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.
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.
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.
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.
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
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
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
compensation insurance from trusted experts
who will help you quote your coverage and manage your policy better.
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