Workers’ Comp Audit Tips for Success

A workers' comp audit can seem complex and intimidating, but there are ways to help you manage. So how exactly do you keep track of your workers' compensation to achieve a successful insurance audit? First, it is helpful to understand how it works. When you purchase the workers' compensation insurance policy, the premium payments are estimated and determined by employee wages, including bonuses and tips, employee class codes (what insurers use to assess their risk level and risk type), and the cost of uninsured independent contractors. Insurers sometimes request a workers' compensation audit to ensure the estimate is correct. If you are over- or under-paying, they can adjust it.

Types of Workers’ Comp Audits

All audits have the same objective. However, the type of workers' comp audit your business calls for is based on the size and industry of your business operations and your insurance premium amount. The two main categories of workers' comp audits:

Physical Audits

Larger companies with higher insurance premiums commonly require a physical audit. Therefore, it will take place at your headquarters.

Voluntary Audits

Insurers typically only require a voluntary audit for small businesses. The insurer sends an audit form by mail to complete and provide supporting documentation for this method. The documents the insurance company's auditor will review and verify throughout an audit include, but are not limited to:
  • Payroll records
  • Subcontractors and contractors' certificates of insurance
  • Employee records and job roles
  • Cash disbursements for subcontractor payments, materials, and labor
  • Description of business operations
The goal is that the insurer's estimate matches your actual payroll.

When to Expect an Audit?

Being prepared is always helpful. Most states require insurance providers to audit workers' compensation policies. Typically when the policy term expires, the insurer will notify you of an audit within 60 days, and are mandatory to secure workers comp coverage. You must be ready for this audit as soon as your policy period ends. Note that a failure to comply will come with some hefty consequences. If the audit is not complete within the specified time frame, your policy can be canceled.

The Common Pitfalls to Avoid

Clearly, complying with a workers' compensation premium audit is essential for your pocketbook and for protecting your company. To make the process run smoothly, keep in mind the top six common mistakes to avoid during your workers' comp audit.

Incorrect Payroll Estimates

This will allow for a smooth auditing process and to avoid a hefty bill after an audit.

Incorrect Classifications

Employee classification is used to determine their risk and, therefore, your premium. You can use the National Council on Compensation Insurance (NCCI) list to find the proper class codes for your employees. If you classify incorrectly, that could lead to a bulk premium sum on your audit bill at the end.

Failing to Include Deductions

Not everything on payroll is calculated into the workers’ comp premiums. For instance, deducting severance pay and portions of overtime pay.

Paperwork Errors

Staying organized with all documentation throughout your policy term is one of the top ways to be successful in the workers' comp audit. How you file records can make all the difference in streamlining the process.

Not Confirming Certificates

Audits require proof of subcontractor and contractor insurance so that insurers can verify that their clients are only covering their own workers, not contractors.

Not Checking State Requirements and Deductions

Be sure you are complying with state regulations.

Be Proactive with Your Workers’ Comp Audit

To help the audit go smoothly, it is best to be proactive. Being communicative with the auditor will help you provide them with what they need for the audit. When the audit is over, be sure to review the auditors' worksheet for accuracy. If an adjustment must be made, it would be wise to fully understand how this change will impact your company. Be sure to make a copy for your records after signing, and don't sign until everything is complete.

About David G. Sayles Insurance Services

At David G. Sayles Insurance Services, we help our clients decide which of these options is best for them based on their current situation and risk factors. Contact us at 1-855-977-1842 or for a consultation!

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