What Is A Workmans Comp Insurance Audit? And How Does It Affect Your Business?

What Is A Workmans Comp Insurance Audit

The workman’s comp is designed to protect businesses and their employees from workplace injuries related expenses. The coverage includes loss of work due to leave, medical expenses, and legal costs when a worker is injured.

Every state has different workers comp regulations, including whether a business needs workers comp and the premium charges. A common requirement in most states is a workers comp audit to ensure businesses remit the right amount for their coverage.

Read on for more details on workman’s comp insurance audit and how it affects your business.

What Is A Workmans Comp Insurance Audit?

A workman comp premium audit is an annual end-of-year record review by your insurance carrier to confirm that your business paid the correct workers’ comp insurance premiums. During the audit, your carrier verifies that all the records quoted at the beginning of the policy reflect the actual during the policy period. Where the records do not match, the insurance carrier will request an adjustment on the workers’ comp for the policy year.

Why Your Business Needs A Workers Comp Premium Audit

The workers comp coverage depends on the number of employees, payroll, and risk levels at the workplace. These metrics can change for a small business as you hire new employees or raise a salary. Signing up for a workers comp premium audit gives your insurance company your payroll estimates for the following years, which they use to establish the initial premium. At the end of the year, your company will have a different outlook from the estimates.

Therefore, a workmans comp premium audit analyzes your business metrics, compares them to your estimates, and recommends necessary adjustments to ensure you pay for the correct coverage. 

How A Premium Audit Is Conducted

Workman’s comp audit is based on payroll, job classifications, and operations. Your carrier will establish the ideal audit method depending on your business size and complexity. These methods include:

  • Online premium audit
  • Onsite premium audit
  • Remote physical audit
  • Phone
  • Remote physical 

How To Prepare For A Workmans Comp Insurance Audit

Preparing for a workman’s comp insurance audit requires you to have the appropriate records in order and available for your auditor. Early preparation will enable the auditor to access what they need hence fewer questions and less time.

The records you will present for auditing include payroll, overtime wages, employer’s quarterly federal tax return forms 941 and 943 reports, federal 1099, W2, and W3 transmittals, a list of your business clerical employees and their duties, and contractor and subcontractor records.

Since the workers’ comp audit will also review your subcontractors, requesting a Certificate of Insurance (COI) from your subcontractor is good practice, confirming that they had a workers comp policy when conducting work for your business.

The workers comp costs depend on the payroll and employee risks on the job. Therefore, the auditor will confirm everyone’s duties to ensure the estimates match the actuals during the audit. The auditor will also review your job descriptions, hence the need to update them in detail or create them if you do not have them. 

Finally, provide what the auditor asks during the audit. Giving more than is needed only makes work harder for both parties.  

What To Expect During A Workmans Comp Audit And Its Effect On Your Business

When it is time for your business workman’s comp insurance audit, your auditor will email you to alert you of the process. Therefore, before the call, ensure you have all the details about your employee activities and payroll within the policy period.

The auditor will digitally assess your records and submit them to verify your payroll. Next, they will verify the information and, using the updated records, adjust the premium where necessary.  Finally, they will send you an audit summary explaining whether your premium has increased, decreased, or remained the same for you to take necessary actions.

What To Expect After A Workers Comp Premium Audit

It is normal for premiums to change after auditing, creating a mismatch between the estimate and actual risk exposure. This can happen if your business expands and you hire more employees, increase your payroll, or lay off some workers due to downsizing. A mismatch will also occur if you change your employees’ job responsibilities to a more or less risky task.

Following these changes, you expect the following scenarios after a workers compensation audit:

  • Your actual risk exposure or payroll may match your estimate, in which case there is no cost difference.
  • Your exposure may be lower than the estimate, and the insurance provider owes you a refund.
  • Your actual risk exposure may be higher than the estimate, and you will pay the insurance the difference.

Penalties After A Workers Compensation Audit

Ignoring a workers compensation audit will attract severe penalties, including financial penalties, cancellation of your policy coverage, legal action, or restriction to future insurance coverage. Financial penalties include extra charges and underpayment penalties.

The workers compensation audit noncompliance charge is the main penalty for ignoring the audit request. You will pay 25-50% in fines for this charge. If you estimate a higher payroll, you owe the insurance company. Ignoring the audit request will delay the insurance provider’s reception of the fee and will cost you more time, paperwork, and money. Therefore, promptly respond to the audit requests to avoid the above penalties and extra paperwork. 

How Can I Dispute The Workers Compensation Audit?

You can dispute workers comp premium audits backdating three years or three policy terms. Hiring an audit specialist for this process is ideal for walking you through it. The specialist will review the audit for mistakes made by the insurance and negotiate in your favor to receive more refund, owe less, or owe nothing. Alternatively, contact your insurance agent providing the policy for the best dispute practices.

Secure Workers Comp For Your Business

Running a small business can be challenging as you have to manage and pay your employees. The law requires workers comp insurance, and the burden is on you to protect your employees. Therefore, instead of waiting for the audit to highlight your weaknesses, collaborate with your insurer in advance to ensure adequate protection of your workers within the policy period.

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