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Workers’ compensation is a mandatory insurance coverage for most employers in the United States. Workers’ comp insurance covers employees who may suffer from injuries on the job, occupational diseases, and time away from work due to illness or injury.
When an employee files a workers’ comp claim with their state’s Department of Labor, they are subject to audits by that department as well as others (such as federal agencies).
These auditors can uncover discrepancies in claims management records – fraud cases that could lead to fines if left undetected.
When workers’ compensation insurance policies expire, insurers examine them. They do this because the policyholder’s first premiums are frequently based on an estimate of their payroll, and they need the real payroll to charge the correct amount. As a consequence, workers’ compensation audits may be a source of anxiety for company owners who may find themselves owing money.
While we can’t publish the particular restrictions for each carrier, we can offer you a broad indication of what to anticipate. The methods below may assist you in getting ready, and you can also obtain a checklist to utilize when your audit arrives.
1. Arrange for a workers’ compensation audit.
The first step is to set up an audit date. Approximately six to eight weeks before your policy’s expiry date, your insurer will notify you that an audit is due. The sort of audit you must plan varies depending on the insurance and state, but there are two basic types:
- A physical audit: A physical audit occurs when your insurance sends an auditor to your company to inspect documents, observe operations, and interview workers, as the name implies. In most cases, the auditor has 30 days to arrange, finish, and submit your papers.
- Voluntary audit: No one shows up for a voluntary audit at your place of business. Instead, the evaluation is done over the phone and by mail. The insurer sends you a form that you must complete and return within a specific amount of time, usually 60 days.
If a physical audit is necessary, make sure you plan it so you can address any questions the auditor may have. That way, you can ensure that the auditor has a thorough understanding of your activities and can appropriately categorize your company.
Other Worker’s Compensation Audits
Workers’ compensation audits do not always happen when policies are about to expire. Some company entrepreneurs may have one or more of the following:
- Preliminary audit: When you initially apply for workers’ compensation insurance, your insurer may undertake an on-site preliminary audit to establish your first rate. If you need to be in compliance soon, this may be more difficult to arrange.
- Interim audits: Insurers may request an audit at any time throughout the term of your workers’ compensation insurance, especially if your business has changed. Employers that wish to pay their workers’ compensation every quarter may also request interim audits. Interim audits are often performed through the mail.
You should still get information from your insurer for both kinds of audits so that you may schedule time for the audit.
2. Collect your documents
Because the cost of workers’ compensation insurance is determined by your payroll, risk, and claims history, the auditor will require information on each of these factors. Typically, audit notifications provide the documents that the auditor may use to validate the data. Although the list may vary depending on the carrier, many insurers need some or all of the papers listed below.
Information in general
- Description of the business’s activities
- Each employee’s job description
- The number of staff.
- Names and titles of owners/officers
- Contractors’ and subcontractors’ work
Records of Payroll
- A ledger for accounting
- Payroll register or journal
- Checkbook for business
- Schedule C of the Federal Profit and Loss Statement (Form 1040)
- Quarterly Federal Employer Tax Return (Form 941)
- Annual Tax Return of a Federal Employer (Form 944)
- Annual Unemployment Tax Return for Federal Employers (FUTA) (Form 940)
- Transmittals of federal 1099, W-2, and W-3 forms
- Reports on state unemployment insurance taxes (forms vary by state)
- Annual time cards or the number of hours, days, and weeks worked
- Overtime Records of Payroll
Records of Cash Disbursements
- Expenses incurred by subcontractors
- Expenses incurred by independent contractors
- Payments provided to ad hoc workers
- Receipts for bought materials
Records of Insurance
- Certificates of insurance for subcontractors
- Worksheet for modifying business experience
What Is Covered by Payroll?
When preparing for an audit, you’ll want to get your payroll, also known as compensation, correct since it’s the beginning point for your workers’ comp premium. However, what constitutes payroll is not always apparent. Each state has its own definition of payment, but in general, it includes:
- Salary and gross wages
- Commissions totaled
- Bonuses
- Overtime, holidays, vacations, and sick days
- Contributions to 401(k)s, savings plans, and individual retirement accounts (IRAs) by employees (IRAs)
- Payments that aren’t dependent on the amount of time worked
- Payments you make that would otherwise be the employee’s obligation, such as Social Security.
- Payments or allowances for workers’ usage of hand or power tools during work
What Isn’t Included in Payroll?
Employee paychecks, on the other hand, may contain payments that aren’t normally considered payroll in workers’ compensation premium calculations. Many states, for example, prohibit:
- Gratuities and tips
- Employer contributions to group health insurance
- Pay for severance
- Business costs that have been reimbursed
- Individual inventions or discoveries are rewarded with special prizes.
- Military salary for active duty
- Allowances for uniformity
- Employees are entitled to discounts on products and services.
Make sure the auditor knows about them so they don’t get mixed up with the rest of your paycheck.
Is a Workers’ Compensation Audit Including All Salaries?
Because company owners are not required to hold workers’ compensation insurance, their incomes are not taken into account during a workers’ compensation audit. However, some jurisdictions allow sole proprietors, corporate officials, partners, and members of limited liability companies (LLCs) to purchase insurance. When they do, their wages are regarded differently from ordinary workers’ since their remuneration is generally much more.
In most states, sole proprietors and partners are paid yearly pay that is separate from their regular wages. Similarly, corporate leaders who choose to participate in workers’ compensation earn a weekly pay that falls halfway between the state’s maximum and minimum wage. Depending on the state’s workers’ compensation standards, LLC members will get one or the other.
3. Make sure your job descriptions are up to date.
The danger your employees encounter at work is another factor to consider when determining your workers’ compensation expenses since the auditor will look into everyone’s responsibilities as well as your company’s overall operations. This might include going through existing job descriptions or filling up a form that details what each person performs. In any case, you should have a solid grasp of what your employees do. Updating your job descriptions—or writing them from scratch if you haven’t already—is a fantastic place to start.
The Importance of Job Descriptions in a Workers’ Compensation Audit
Although you may be tempted to skip this step, thorough job descriptions may be quite useful during a workers’ compensation audit. Your auditor will be able to identify the right regulatory class code for your company based on accurate job descriptions. A base rate is assigned to each class code, which is utilized in a formula to calculate your expenses. Using the incorrect class code might result in you paying the incorrect premium.
The rate allocated to your class code, your experience modification rate, and your payroll divided by $100 make up the fundamental formula for determining workers’ compensation insurance expenses.
Let’s pretend you’re the owner of a $100,000-a-year artisanal beer brewery in Wisconsin. Your firm is assigned the class code 2121 by the auditor, which indicates your base rate is $3.11. Let’s say your experience modifier is one, so it has no effect on your rate, and there are no extra fees or reductions to complicate matters. If all of this is correct, your workers’ compensation premiums will be $3,110 per year:
However, if you omit to disclose that you have a clerical employee (class code 8810) who makes $40,000 per year, your auditor may overestimate your premium. Employees in the clerical profession are an example of standard exception classes. These classes are not part of the governing class code, hence they are graded independently. Because your clerical worker’s base rate is 20 cents, the employee’s annual insurance expenditures are just $80:
In the end, your workers’ compensation bill should look something like this:
Your total insurance expenses decrease when you grade the office employee differently from the rest of the employees. Having this information on hand during your audit helps the auditor in appropriately assessing your premium.
4. Examine the Auditor’s Report
When your audit is finished, go through the auditor’s work to make sure his information corresponds to your knowledge of your company’s payroll and operations. The following is a list of important facts to review:
- Payroll data: Make sure your audited payroll matches your accountant’s or accounting department’s payroll.
- Governing Classification: Unless your operations have been completely overhauled, your governing classification should be the same as the one on your initial workers’ compensation insurance.
- Any other classifications: If your state permits it, check to see if any standard exception classes have been mentioned. The same is true for construction companies, which are allowed to utilize numerous class codes for individual employees.
After you’ve seen the auditor’s work, sign whatever documentation the auditor requests to show you’ve participated and comprehended the findings. If you performed the audit remotely, this stage may not be accessible to you, but your insurer should email you a summary of the auditor’s conclusions. If the findings don’t seem right, you may ask your insurance for further information.
How to Challenge a Workers’ Compensation Audit
You may rest until next year’s audit if you didn’t have to pay any higher premiums or even got a refund. Your insurance, on the other hand, may conclude that you paid too little and issue you a charge. In such an instance, you must either write a check or file a challenge against the audit.
For contesting a workers’ compensation audit, each carrier has its own set of regulations. Most insurers, however, require employers to register a disagreement in writing within a certain amount of time, so you should contact your carrier right once. Your carrier will very certainly want to know why you believe your bill is inaccurate, as well as an estimate of what it should be. You won’t be obliged to pay the extra premium while your insurer investigates your claim, but you may be required to pay any uncontested amount of the audit bill by the due date on the audit bill.
Auditing Workers’ Compensation: Common Mistakes
The fact that you were charged an extra fee does not necessarily imply that the auditor made a mistake. Because workers’ compensation premiums are complex, errors are frequent. Here are some of the most frequent blunders:
- Payrolling stuff that isn’t supposed to be there
- Employees with incorrect class codes
- Modifying the experience modifier
- Adding a fee for a subcontractor who is insured
- Incorporating exempt employees into the payroll
How to Make a Workers’ Compensation Audit Go Smoother
You can’t dodge an audit since every firm that offers workers’ compensation insurance analyzes policies at the conclusion of their periods. If you choose pay-as-you-go workers’ compensation, however, the audit procedure will be a lot simpler.
Workers’ compensation on a pay-as-you-go basis is a payment method in that your insurer costs you each time you run payroll. This normally involves manually uploading or entering your payroll data into the insurer’s portal. Some payroll firms, on the other hand, can work with your insurance to automatically submit your data and pay your premium.
The main benefit of a pay-as-you-go plan is that your workers’ compensation premium will be more precise. Although your insurer must still audit your policy since categorization or remuneration problems may exist, pay-as-you-go options often result in fewer premium increases.
Frequently Asked Questions(FAQs)
Small company owners may have extra questions as a result of the stress of a workers’ compensation premium audit, particularly if they seek to avoid one or are anxious that they will be forced to pay a large premium after theirs is completed. Below are some of the questions we’ve been asked.
Is it necessary for me to go through a workers’ compensation audit?
Almost all workers’ compensation insurance plans include wording requiring the policyholder to submit to an audit. The policyholder must accept an audit within three years after the policy’s expiry date, according to the National Council of Compensation Insurers (NCCI) regulation, which is adopted in most states.
What happens if I don’t follow a workers’ compensation audit’s instructions?
If you refuse to cooperate with your insurer’s request for an audit, your premium may be canceled, making it difficult to get coverage later. Furthermore, state law may enable your insurer to impose a fine—up to 300 percent of your initial premium—and send your account to collections. Finally, your insurance has the option of filing a lawsuit to recover both the initial amount and the extra penalty.
What if I can’t pay the premium audit charge retroactively?
Premium audit invoices are generated by unplanned payroll throughout the course of the year and are usually payable immediately or within 30 days after receipt. If the cost is large, contact the billing department of your insurance company. The majority of carriers will set up a payment plan for you, usually dividing the amount into three installments. Inquire about your alternatives with the billing department.
Conclusion
When it comes to planning for your yearly review, knowing the workers’ compensation audit standards improves the process go more smoothly and generates more accurate findings. A small business owner may assist the auditor to gain a clear view of the firm’s activities while also reducing her personal stress by having well-organized company files and payroll data.
