Workers’ Compensation: Preparing for an Audit
The concept of a workers’ compensation audit (premium audit) is simple, but the effort to make it accurate can be confusing and time consuming if you are not prepared. The information on this page is intended to assist you in preparing for an accurate and positive audit experience.
- What is a workers’ compensation premium audit? Definition, explanation of audit time period, and what information is considered
- How is the audit conducted? Information may be gathered by GuideOne or an independent auditor
- Materials to have ready for the audit Information you can gather prior to the audit to expedite the process
- Related Resources FAQs, glossaries of terms, related websites
A policy is normally effective for one year, and the premium is based on the annual compensation that is anticipated at the beginning of that year. A workers’ compensation premium audit is the process that determines how much the compensation has changed by the end of the year so that the final premium paid can be made proportionate to the actual compensation amount.
Workers’ Compensation Audit timing
This audit should be done for any time that a policy was in force (current and still in effect), even if the policy has already been renewed and is in the next term or if it has been canceled. Normally the audit is conducted about 30-60 days after the policy term ends.
Note: The policy term refers to the dates covered by the policy, which is usually one full year extending from the effective date to the expiration date one year later.
The most significant considerations carriers use in determining workers’ compensation premiums are as follows:
- The amount of payroll generated by the employer. This is the most important factor and may encompass more than you realize. In addition to wages and salaries, payroll includes several other types of compensation, including housing and other non-cash compensation meant to offset lower wages.
- The classification(s) assigned to the employees based on business operations. The classification system matches different workplace exposures with corresponding classification codes, each one with a rate proportionate to the risk associated with that exposure. However, it’s often difficult to determine exactly which classification code of the hundreds available is the most appropriate one to use. That is why duty descriptions for your employees are very important.
- The past loss experience of the employer. This consideration is the experience modification factor, which is a calculation that applies to policies with more than $5,000 in premium. Carriers compare individual employers with other employers within the classification based upon the frequency of accidents and severity of injuries.
All of these factors are compiled into a comprehensive calculation of overall premium.
GuideOne Insurance may A.) send out a mail (voluntary) audit form, OR B.) hire an independent auditor to gather the necessary information.
- You will receive a mail audit request. GuideOne Insurance usually mails out a simple mail audit form that asks for the necessary employee compensation information. Important: You need to complete and return the form that is mailed to you even if the policy has been canceled. You do not need to work with an auditor to do this type of audit. SAMPLE mail audit forms (PDFs):
- Independent auditors will contact you. In other cases, GuideOne may use professional independent auditors to review the information before it is turned in to GuideOne.
When this is done, the auditor (the person who conducts the audit) will call to get the information over the phone or will ask to set up an appointment to visit your location, as described below.
In either of these cases, the information will be most accurate and easiest to locate if it is collected throughout the policy year. See materials to have ready for the audit.
The auditor should always contact you in advance of the audit to set up an appointment and should provide a way to communicate, such as a phone number and email address. (It is unusual for the same auditor to do your audit from year to year.)
- The appointment should be made with the person(s) most familiar with your workers’ compensation policy and the duties of all your employees.
- The appointment should indicate how long the audit is expected to take so that your participants can be available during the whole process.
- If the person/people scheduled for the audit later find that they will not be available, notify the auditor as soon as possible, and the appointment will be rescheduled.
- Results of the audit will be given to GuideOne, and any adjustment to your premium for that policy term will be made. (The policy term refers to the dates covered by the policy, which is usually one full year extending from the effective date to the expiration date one year later.)
- If there is significant change noted during the audit of the prior term, the payroll information used for your current policy term (the period of time that the active policy is in effect) might also be adjusted so that it more accurately reflects current compensation.
- The resulting bill or refund will then be sent directly to you.
- Your auditor does not participate in billing actions and cannot tell you what the resulting premium change will be.
As a GuideOne policyholder, you should have the following information available prior to an audit. Though, the following documents are helpful, they are not mandatory, nor would they necessarily in all cases provide all the information required.
1. Descriptions of Employees’ Duties.
Use the GuideOne Statement of Duties (Excel) to record information about your employees’ assigned duties. Any job descriptions you have available would be helpful in documenting this information.
Updating this spreadsheet ahead of time is most easily accomplished if it is made a part of normal personnel actions, such as when hiring, conducting employee assessments, and/or applying raises in salary.
2. Employee tax information.
- Form 1099 for any worker who has an employment relationship, even if the worker is not considered an employee for other purposes, such as benefits.
- Employer’s QUARTERLY Federal Tax Return Form 941: IRS Form 941 (PDF) | Instructions for Form 941
OR you must file the annual Form 944 instead of filing quarterly Form 941 only if the IRS notified you in writing:
3. Payroll data.
Accounting records of payroll, whether maintained by your own staff or by an outside agency, including a general ledger, a record of cash disbursements, or a checkbook will be helpful.
Important: Payroll data should be related to the term of your workers’ compensation policy. If the period of time covered by your workers’ compensation policy does not correspond to the dates on these documents, you must provide information for all the years covered during which your policy was in force (current and still in effect).
For instance, if payroll is tracked by calendar year, but your workers’ compensation policy begins and ends on a different day, such as July 1, then the payroll must be computed to reflect that time period (for example, from July 1, 2009, to June 30, 2010).
Learn more: Workers’ Compensation Payroll FAQs (PDF).
4. Other financial transactions related to employees.
For instance, payments for housing, travel, or other expenses made on behalf of an employee.
Compensation not included in payroll, such as housing or travel, should be LISTED BY INDIVIDUAL EMPLOYEE, even if actual costs are not incurred by individuals. For example, if two houses and a garage are rented for staff members to live in from the same landlord with a single payment, the value of that rental for EACH staff member must be determined and recorded.
5. Contractor payments, including general and independent contractors, visiting pastors or a music/worship team.
Frequently Asked Questions (FAQs):
© 2020 The GuideOne Center for Risk Management, LLC. All rights reserved.This material is for informational purposes only. It is not intended to give specific legal or risk management advice, nor are any suggested checklists or action plans intended to include or address all possible risk management exposures or solutions. You are encouraged to retain your own expert consultants and legal advisors in order to develop a risk management plan specific to your own activities.