Common Mistakes on Workman’s Comp Audits That Can Cost You

If you pay for workman’s compensation insurance, you know that an insurance audit is inevitable and can be overwhelming. Unfortunately, we cannot hide from these audits or magically make them go away. But with the right steps, you can make them more manageable and less daunting.

Let’s take a deep dive into how you can keep tabs on your workman’s compensation to achieve a successful insurance audit.

What Is A workman’s Compensation Audit?

Before we can help you understand your insurance audit, it’s important to understand what it is. When you buy a workers’ compensation insurance policy, the premium payments are estimated by certain factors.

Your premiums are determined by:

• Employee wages including bonuses and tips
• Employee class codes
• Cost of uninsured independent contractors

To check that the estimates are right, your insurance company can request a workman’s compensation audit. This audit will verify that the premium estimate matches your needs for insurance coverage.

If there is a difference between the estimates and what you actually need, it means you’re either overpaying or underpaying for your coverage. In that case, your insurance carrier will require a premium adjustment. An adjustment means you will either have to pay more or less for insurance.

If you overpaid for workers’ comp insurance because your premiums are too high, you’ll get money back, and if the premiums were too low, you’ll owe money back to the insurance policy.

A Final Audit Statement is sent to you after the audit is complete. The Final Audit Statement shows any premiums you must pay your insurance company or any refunds they owe you. Usually, adjustments result from errors in payroll calculations or incorrectly classifying the type of employee work or class codes.

Types of Workman’s Compensation Audits.

Generally, there are two categories of workman’s comp audits—physical audits and voluntary audits.

• Physical Audits—Larger companies with higher insurance premiums likely need a physical audit. This means that the premium audit will take place at your headquarters.
• Voluntary Audits—If you run a small business, your insurance company may only require a voluntary audit. With a voluntary audit, your insurer sends an audit form via mail. You’ll have to complete the audit form and provide supporting documentation.

What An Insurance Company Looks For In An Audit.

Insurance companies are making sure that your payroll and classifications are correct.

Here are some of the documents the insurance company’s auditor will review and verify during an audit:

• Payroll records such as payroll journals and summaries, overtime payments, federal tax returns from the IRS, state tax returns, and state unemployment tax reports
• Certificates of insurance for subcontractors and contractors
• Employee records including Form 941, job roles of each employee, time worked, and your total number of employees
• Cash disbursements for subcontractor payments, materials, and labor
• Description of business operations

Remember, the insurance company wants to ensure their estimates match your actual payroll, which is why they’re requesting all these documents. You’ll also notice subcontractors on this list. Insurers will want to make sure they’re actively insured. If not, you will likely be charged an extra insurance premium for the subcontractors that don’t have coverage.

Common Mistakes To Avoid

1. Incorrect Payroll Estimates You’ll want to make sure your payroll estimates are as precise as possible. Accurate estimates make for a smooth auditing process. They also help you avoid a hefty bill after an audit. You must also make sure that your internal payroll matches the audited payroll. To do this, ensure the information you provide your auditor is correct and that you verify the auditor’s work.Work with an insurance agent or broker who understands the operations of your business and is aware of the changes that can happen during the policy term. Transparency may simplify the audit process.
2. Not Classifying Employees Correctly Class codes are used to calculate your workers’ compensation insurance premiums. Employees with a higher risk of injury on the job have class codes with higher insurance rates, which increases your premium. When in doubt, you can always contact your insurance agent if you have specific state-related questions.
3. Failing to Include Deductions Not everything on your payroll is considered when calculating workman’s comp premiums. For example, you can deduct severance pay and portions of overtime pay (if you pay more for overtime than regular hours).
4. Paperwork Errors Staying organized is key to a successful workman’s comp audit. Organizing and filing all payroll records and other documentation throughout your policy term can streamline the process.
5. Not Confirming All Subcontractors and Contractors Have Certificates of Insurance One requirement of a premium audit is to prove that your subcontractors and contractors have insurance. This is because your insurance carrier wants to make sure you’re only covering your own workers, not contractors.
6. Not Checking State Requirements and Deductions Unfortunately, workman’s compensation insurance requirements and exclusions vary by state. Small businesses operating in one state don’t have to worry about changes in other states as much, but multi-state corporations do. You can’t assume that the rules of one state will apply in another.

Be proactive In Your Insurance Audit.

To make sure you have the smoothest audit you possibly can, take the bull by the horns and be a proactive participant in the auditing process.

Being communicative with the auditor ensures they have everything they need for the audit. And, remember, when the audit is over, review the auditors’ worksheet for accuracy. If there is a need for a premium adjustment, make sure you understand the impact this change will have on your company. After you sign the worksheet, make a copy for your records.

However, if the workers’ comp policy worksheet is not complete, don’t sign it until it is. You want to understand what you’re signing before you do.

Knowing the common audit pitfalls and using these tips will streamline the audit process. Pairing your knowledge of your business operations with an insurance agent or broker’s expertise will increase your chances of success.

If you need some professional assistance with your next workman’s comp audit, contact the experts at Stash Bookkeeping to ensure your next audit goes smoothly.