Last Updated: Apr 21, 2021
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While workers’ compensation requirements can differ between states, many policies include a routine premium audit process. Different from most other lines of commercial insurance (e.g., property coverage)—in which potential exposures can be identified upfront and premium expenses are final—workers’ compensation premiums paid at the beginning of policy periods are provisional amounts.
In other words, these premium expenses are purely estimates based on an organization’s projected payroll and operations for the upcoming policy period. That being said, the purpose of a premium audit is for an insurer to evaluate an organization’s actual payroll and work performed at the conclusion of a policy period to determine whether the initial premium amount was appropriate.
Depending on the results of a premium audit, an organization may either owe additional expenses to their insurer or have funds returned to them. Part 1 of this series explained premium audits in more detail. Review this guidance to learn more about how to prepare for a premium audit and next steps following an audit.
Preparing for an Audit
There several ways that your organization can prepare for a successful premium audit. First, it’s important to have a detailed, organized record of the following documents for your auditor:
- Tax information—This includes W-2 forms, 1099 forms, Form 941, Form 944 and your organization’s federal tax return.
- Payment and payroll records—This includes your accounting ledger, payroll journal, overtime payroll records, material and labor payments, state unemployment tax reports and individual earnings records.
- Employee information—This includes a detailed outline of job duties for each employee, their classification rates and their work schedules.
- Insurance certificates—This includes certificates of insurance for any independent contractors or subcontractors hired. Remember that if the contractors your organization hires don’t supply their own workers’ compensation insurance, you may have to provide coverage for them.
- Additional business information—This includes your general ledger, sales journal, cash receipts, sales tax records, mod factor worksheet, a detailed summary of business operations, and information on each of the organization’s owners and partners (if applicable).
In addition to supplying these documents in an organized manner, it’s critical to make sure all of the information your organization gives the auditor is truthful. Providing false information (e.g., incorrect payroll, false job descriptions, phony tax returns, fake insurance certificates or incomplete financial reports) could lead to prosecution by your state’s insurance department for insurance fraud.
As such, always check to confirm that your organization’s documentation is accurate and honest. In the case of telephone and in-person audits, be sure that a knowledgeable individual is available to answer any questions that the auditor might have.
After the Audit
Once the audit is completed, the auditor will send your organization a report detailing their findings—such as whether any classification rates need to be changed or whether the payroll estimate was correct. From there, you will know if your organization must pay more premium charges or will receive a premium refund. If you agree with the auditor’s findings, it’s best to take any necessary actions (e.g., paying extra charges or updating classification rates) immediately.
On the other hand, if you disagree with the auditor’s report, you can file a dispute. Make sure you contact your insurance company directly for instructions on how to properly dispute a premium audit. Most insurers require you to send audit disputes in writing within a specified period of time, describe the problem in detail (with adequate reasoning) and suggest an alternative solution. The insurance company will then carefully review your dispute and determine whether an audit revision is necessary.
Typically, any obligation to pay extra premium expenses will be put on hold until the dispute is resolved. If your insurer does not address your dispute in the way you wanted, you can appeal their consensus to your state’s workers’ compensation board. It’s best to consult legal counsel for further guidance in this scenario.
PAYGO Policies
To minimize the risk of having to pay large audit balances at the end of a policy period, some organizations opt for pay-as-you-go (PAYGO) workers’ compensation policies. PAYGO policies allow organizations to pay their premium costs in real time rather than at the policy’s inception, with premium calculations based on actual payroll information.
Nevertheless, PAYGO policies do not excuse organizations from the premium audit process. Organizations with PAYGO policies must still have routine audits done to ensure their premium calculations are correct. However, the findings from premium audits tied to such policies usually result in fewer added expenses than those of traditional workers’ compensation policies.
Closing Thoughts
Overall, it’s crucial for your organization to have a clear understanding of the premium audit process and how it can impact your workers’ compensation costs. More than anything, make sure your organization is fully prepared for an audit—never ignore an insurer’s audit request.
The majority of workers’ compensation policies include a contractual obligation to allow an audit to take place for as long as three years after the policy’s expiration. Failure to comply could result in the termination or nonrenewal of your policy.
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This Work Comp Insights is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.
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