It’s important for employers to fully understand the nuts and bolts of a workers comp audit. Many employer find themselves owing huge audit bills due to poor planning or attempting to reduce the startup cost for coverage.
Workers Compensation insurance is based on a payroll “estimate” for the upcoming 12 month period starting with the effective date of the policy. Each business type is assigned one or more workers compensation class codes that fit their business and job duties. Each of those codes are assigned a percentage rate factor know as a manual rate.
Payroll multiplied by the percentage rate factor for each class code determines the premium amount charged for the policy. After the policy period (1 year) is complete, EVERY standard workers compensation insurance carrier will perform a payroll audit for the previous 12 months of coverage. This is know as an annual audit.
During this audit process the auditor can require a physical audit or a mail audit. Mail audits are fairly simple, complete the worksheet and submit the requested payroll verification documents. Most carriers will want copies of quarterly tax documents to validate the information on the mail audit.
Physical audits require the auditor to meet with the business owner to collect and verify payroll documentation and inspect the business to determine the proper classification code(s) were used. Payroll documents the auditor will collect are year-end tax reports, payroll ledgers and 1099 payroll information.
The purpose of the audit is to determine the “actual” wages paid to employees and to make sure the employees are classified correctly. After the audit process is complete, the auditor reserves the right to change or modify the workers compensation class codes as they interpret the business based on their inspection.
The auditor will report the “actual” wages paid to employees and uninsured 1099’s per class code to the insurance carrier. The insurance carrier will adjust the payroll figures and class codes then send the business owner a refund or an invoice for the additional amount due. If the business owner fails to complete the audit as requested, it will likely create difficulty purchasing another workers compensation policy.
After the business owner receives the audit results, the business owner can dispute the results if they feel that some information is incorrect. Business owners can go directly to the carrier’s audit department to capture the auditor’s report/notes, or business owners can involve their agent to assist with this process.
If a work comp classification code is changed and the business owner doesn’t agree, the business owner must request an inspection by the appropriate state workers compensation bureau or NCCI. Typically this request costs the business owner a few hundred dollars to have an inspector determine the appropriate codes.
The bureau inspection and classification code determination is final, and may be applied back for up to 3 years.
Understanding how the audit process works helps employers better manage their workers comp coverage. It’s important to ensure proper classification of employees and accurate payroll expectation before you buy workers compensation coverage.