When to purchase a work compensation policy

In most states in the US, any business with more than one employee must purchase a workers’ compensation insurance policy. The cost of this policy depends on how large the business’ payroll is, the industry the business is in, the state in which the company is located, and other factors. In some states, there’s a fine issued to businesses that do not carry workers’ compensation insurance when it is required.

A company should renew its workers’ insurance policy each year. At the end of the policy period, the insurance company will conduct a workers’ comp audit that reassesses the company’s payrolls and other financial information to determine whether the premium—that is, the monthly amount that the company pays to the insurance company—should stay the same, increase, or decrease.

Many states allow companies to shop around for the best insurance plan. However, some states, like Washington, require that businesses purchase their insurance plans from a state fund, leaving companies with less choice about which plan to purchase. These funds often come with regulations that are important for businesses owners to understand when acquiring worker’s compensation insurance.

What happens during a workers’ comp audit

A workers’ comp audit is a routine process. The workers’ compensation insurance company first needs to review a number of the policyholder’s documents, such as payroll records, tax documents, bank statements, and other employee information. Reviewing these documents will allow the insurance company to assess whether the policyholder should pay the same amount as they had the year before, or if their premium should change.

If the company had a workers’ comp policy the previous year, they should have a certificate of workers’ compensation on file and handy.

A business owner might want to create a workers’ comp audit checklist for themselves as a reminder about what to prepare when the annual audit occurs. This way, business owners can easily locate and organize all the documents needed for the audit.

Workers’ comp audits can be done in a few different ways:

  • Onsite: Auditors can come to the business’s workplace and conduct the audit onsite.
  • Online: Many insurance companies allow business owners to provide payroll verification online, either through video conferencing or through digital document uploads.
  • Estimated Verification: This type of workers’ comp audit can occur when a business does not provide timely documentation. The insurance company then makes its own estimates as to what the company’s payroll is. This can cause delays with getting accurate numbers from the insurance company and/or result in higher premiums than expected. Companies should provide the proper documentation as promptly as possible in order to avoid estimated payroll verification.

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Workers’ comp audit outcomes

The most important factor in a workers’ comp audit is the employee payroll. Payroll is a major factor in calculating the total premium amount. While a company’s industry or location may not change from year to year, the payroll likely will. The insurance company then applies their rate to this new payroll number, resulting in a different premium amount.

For example, if a company’s payroll increases as a result of hiring more people, then the standard insurance rate will be applied to this new, larger payroll. The company will then be charged a higher premium to reflect the larger number of employees.

Another factor that may change the company’s insurance rate is the experience modification rating. If the company’s mod rate has changed, either as a result of having fewer or more workers’ comp claims in the previous year, then the overall insurance rate would change. The mod rate is meant to reward companies with a lower premium if their number of claims has remained reasonable, which reflects a safe working environment.

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During a workers’ compensation audit, the company’s payroll will get verified. Audits look at the payroll because a workers’ comp premium is partly based on the amount of compensation paid to employees over a policy term.

The first thing any business owner should do before an audit is gather important records and documentation. The auditor will often need financial data for the policy period, such as payroll information and tax documents. Another important pre-audit task is to update the job descriptions for all business employees. Workers’ compensation insurance costs are calculated based on two factors: the payroll, and the risk the company’s employees face on the job. Completing these two steps prior to a workers’ comp audit makes the process easier.

If the company does not fulfill the audit request within a reasonable time (usually 30 days), the insurance company may estimate the prior year’s figures, almost certainly on the higher side to mitigate risk, and charge the company an additional premium. Or the insurance carrier may simply choose to cancel the coverage.

A final audit is a review of the company’s payroll and business operations that occurs at the end of the policy period to ensure that the insurance carrier charged the company the right amount. It is a normal part of the workers’ compensation process that helps ensure that you’re only paying for the coverage you need.

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PAT SMITH
OKLAHOMA CITY, OK

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