Workers’ Compensation is a kind of insurance to protect employees from the cost of medical care and lost income if they are hurt at work.
The cost of Workers' Compensation is directly related to payroll. Different types of work (based on chances of injury) use different classifications, each of which carry specific rates. While rates do differ from state to state because of differing loss expereince, rates within a state are the same. So the rate for any given classification will be different in Massachusetts than it is in Connecticut or New Hampshire for example.
An important factor in getting the pricing correct is the policy year-end audit. The purpose is to reconcile the estimated payroll from the beginning of a policy year with the actual payroll at the end of the year. For example, if you estimated your payroll would be $1,000,000 in the forthcoming year (and paid premiums based on that payoll), but payroll was actually $1,200,000, the company makes a retroactive adjustment, in this case for insurance based on an additional $200,000 of payroll.
There are three different kinds of audits, broadly speaking.
- The first is the self audit where the business owner, treasurer or bookkeeper lists employees, confirms what they do (to determine which class they belong in) and provides documentation from tax forms (quarterly 941s).
- Another type is the telephone audit where an auditor calls the book keeper or accountant and asks for the numbers over the phone. The classification and payroll assignment is done by the phone auditor. Tax forms and other documentation may follow by email, fax, or snail mail.
- The third format of audit is on-site, commonly used with larger companies and more complicated payroll. For on-site audits the auditor spends time going through the forms and collecting copies to confirm that tax forms match disclosed payroll records.
Once the payroll is known and classifications assigned, raters or underwriters calculate the corrected premium for the previous policy year. If the original estimate was high, then the company buying the Workers' Compensation (the policyholder) gets money back. If, on the other hand, the payroll estimated was low, then the premium for the additional payroll charge is assessed. It is also payable and due immediately, since it is a charge from a prior year policy.
What happens if the audit is not completed?
Insurance companies really want you to complete that audit, tedious and painful as that process can be.
They have a more painful process for not completing the audit.
Here's how it goes down:
- If an audit is not received within a reasonable amount of time, (generally 60 days after the policy term ends), the carrier issues an “estimated audit”, increasing the payroll from the prior policy term by 50%.
- As with a real audit, the premium is due and payable immediately. When the invoice for half of your Workers’ Compensation is presented to the treasurer, owner or controller, it gets everyone's attention, which is the idea. Because it is due right away, there is little time after the estimated audit is issued to have the real audit completed before a cancellation notice is issued for non-payment.
- Remember, any premium due for an audit was for a prior policy year, so financing is seldom an option either. More often you need to pay the estimated audit, and perform a real audit to get an overpayment back. It’s brutal.
- Don’t ignore the cancellation notice, or it gets worse. If the Insurance is canceled, the state Department of Industrial Accidents (DIA) is notified. These guys are the ‘insurance police’ for Worker's Compensation compliance.
- Because Workers’ Comp is required by law, the DIA can issue a stop work order at your place of business and literally shut your business down, since failure to have Workers' Comp for your employees is illegal. Once this happens the solution is to pay the previous carrier all money it is owed, and purchase a new policy. To avoid delays (and continued stop-work order), the quickest solution is to go to Boston to get policy reissued by paying the estimated premium and applying for replacement insurance right at the Workers’ Compensation Assigned Risk Board.
We have seen this clip a few times; it is not worth the aggravation.
For more about Workers’ Compensation and managing costs associated with this line of business, contact us here at Gordon insurance.