The Workers’ Compensation Insurance Rating Bureau is considering raising the premium threshold for the annual physical audits of employers’ payrolls conducted to ensure they are correctly reporting their employee counts.
Currently the trigger is $10,000 in annual premium, but the Rating Bureau’s Classification and Rating Committee has recommended to the organization’s governing committee that the threshold be raised to $13,000 in light of recent premium increases and because the level has remained the same since 2007.
If the Rating Bureau recommends the change and the state insurance commissioner approves it, the adjustment would take effect for policies incepting on or after Jan. 1, 2015.
That would be good news for many smaller employers in the state, especially those that have been on the cusp of the $10,000 premium mark.
Premium audits explained
A workers’ compensation premium audit is a review of your records and operations to ensure that your coverage information is accurate. The goal is to assess and collect a premium that accurately represents your risk exposure, particularly in terms of employee numbers as well as the types of employees you have. The audit is compared to what you reported to your insurer when the policy was written.
Your premium is calculated based on the projected payroll information your insurer receives from you at the inception of your policy. To make sure that your premium is priced accurately and fairly, the insurer will compare your payroll estimates to your actual payroll at the end of your term. Each policy term may have a physical audit or a mail audit, based on the size of the policy, the nature of your business and other circumstances.
An audit is usually performed shortly after your policy expiration, but the insurer can also perform it earlier to verify the accuracy of your estimated exposures.
Audits are also conducted after a policy cancellation, in order to determine the final earned premium for the shortened policy period.
Audits are typically performed on an annual basis, but can be performed at any time during or after your policy period.
If necessary, a premium auditor will contact you to make an appointment for a physical (on-site) audit. They will examine your records to determine the correct exposure, or risk. This may include: payroll records, journals, tax reports, individual earnings cards, cash disbursements, etc. The various operations of your company may be observed to help better categorize the risk classes.
Preparing for an audit
Once you know an audit is pending, you should prepare as well as possible to ensure it goes smoothly and that there are no surprises. This entails at least the following:
- Have all of your necessary records ready.
- If possible, your payroll should be organized by: policy period, classification code (list each job type separately), regular pay vs. overtime.
- Report your “total gross” payroll.
- If the insurer mails your audit materials, complete all the forms and return them promptly.
- If you have subcontractors, ask them to provide a copy of their Certificate of Insurance to keep with your records.
- Be available in case the auditor has questions.
To assist you in gathering the necessary records for your premium audit, refer to this checklist. Make sure that records are available from the previous calendar year. These records include:
Federal Form 941
Federal Form 940
Federal Form W-2
Federal Form W-3
Federal Form 1099
Federal tax return
Individual payroll records, with overtime broken out
List of clerical employees and corporate officers
General ledger, check register, and any cash disbursements
Verifiable payroll breakdown as applicable
Sales journal and cash receipts
Certificates of Insurance for subcontractors used
Job cost records, contracts, work invoices, type of work performed.