If you have a Workers Compensation Policy or anticipate obtaining one in the future it is important to understand how the policy works and be prepared for an audit of your policy. Working with a workers compensation auditor doesn’t have to be difficult if you are prepared for following through with the entire process.The audit will be scheduled for you to provide necessary information to the auditor, such as all payments to your employees. It will also require you to keep accurate records to begin with, as well as future projections of your annual payroll when you apply for a new policy. Learn more about workers compensation and how you can comply with an audit.
Beginning a Worker’s Compensation Audit
To begin, you must know what worker’s compensation entails. Workers Compensation is the insurance policy that covers the wage replacement and medical expenses for workers that are injured while they are working for you. For example, a worker falling off a ladder inside your office and breaking their arm would typically be covered by workers compensation insurance.
This should not be confused with a General Liability policy which protects you from the expenses due to bodily injury to a third party (ie, customer or client).
Why Is a Worker’s Compensation Audit Important?
A Workers Compensation Audit is a way for the insurance carrier to validate the premium you are paying. Since the insurance carrier is a business, they must make sure they are charging the correct amount (or refunding you) for the coverage they are providing. Workers Compensation audits are mandatory, so it’s important you are prepared.
Schedule a Workers Compensation Audit
Your workers compensation insurance carrier will reach out to you via the mail, email, or phone to initiate the audit process. It’s important your contact information is correct, so they can get in touch when the audit is due. Double check with your agent and make sure your info is correct.
Here’s some of the information they will typically ask for:
- Accounting ledger
- Worker payroll records and contract worker payments
- Tax forms(941 and 944), Employers Federal Tax Return
- W-2 and 1099 forms
- Records of cash disbursements
- Certificate of insurance for each subcontractor you hired (explained here later)
- Job description for each worker (make sure they include accurate details of duties)
Track All Employee Paychecks
All payments must be tracked and accounted for, including full time employees, part time employees, interns, or contract workers. There are plenty of tools you can purchase that will simplify the tracking process. If you are tight on budgets, the best way to track payments is an excel spreadsheet and a Google drive with recorded payment stubs. A few of our favorite outside services to use include both Gusto and T Sheets by Quickbooks.
Perform Accurate Payroll Projections
All workers compensation policies are calculated by a rate multiplied against your annual payroll. The insurance carrier applies that rate to the payroll to assess the amount of risk they are insuring (lower payroll means less workers). Since insurance companies are also businesses, they conduct audits to make sure they are charging an accurate premium and maximizing their earnings for the coverage they are providing.
Every year we have clients that make mistakes on their estimated payroll and get stuck with a bill from the insurance carrier. It’s best to project the total amount you plan to pay out to your workers when you begin your workers compensation insurance policy. If you end up paying less than projected, the carrier will refund you at end of the policy term.
Keep Contract Workers Insurance Certificates
There are some misconceptions about whether contract workers (1099’s) are covered under a workers’ compensation policy and if you need to track their payroll. Unless stated as an exclusion within the policy, a workers compensation policy covers contract workers.
If the contract worker carriers their own insurance and has a workers compensation policy, then you’ll need to ask for a certificate of insurance. The insurance carrier will ask for proof of certificates during the audit if you pay out any contractors. If they have their own insurance, the payment will not apply and is not going to be included in the total payroll. If they do not have their own insurance, you are responsible to pay for the payroll associated with each worker.
Audits Occur When The Policy Expires
There is a misconception that audits happen during a certain season or month of the year. This is not the case – audits happen when the annual policy expires. If your policy starts in March you can expect an audit 12 months from March.
As a policyholder, it’s not only your obligation to provide the information the adjuster requests, it’s also your obligation to provide accurate data. If the information is false, you could be prosecuted for insurance fraud. Underreporting payroll, concealing sub-contractor work, and fake certificates of insurance are a couple of the ways you could be punished. If you disagree with the report provided after the audit you can always dispute it. Contact your agent immediately and they will guide you through the audit dispute process.
For more information about the Workers Compensation auditing process or to learn how to apply for a policy, contact MFE Insurance. We have the experience to guide you through an audit and assist you in purchasing a policy.