A workers’ compensation audit – also called a workers’ comp audit – can be daunting, if not a bit intimidating. The good news is every company gets through it, but how do you get through it with flying colors?
As stressful as it may be, a workers’ comp audit can work to your benefit.
To ease your mind, we will explain what a workers’ compensation insurance audit is, why insurance companies require them, and what to expect when you get notice of an upcoming audit.
What Is a Workers’ Comp Audit?
When you apply for a workers’ compensation policy, the premium you pay is only an estimate. The insurer takes employee data into account and projects how much you need to pay over the policy term based on the exposures.
The insurance company is interested in knowing how many employees you have and what types of work they perform for your company.
At the end of the policy term, the insurance company will revisit the data to see if the projections are accurate. The way they do that is by gathering data that reflects the number of employees and their positions over the policy term, which is usually a year. This is called a workers’ compensation audit.
The reason for an audit is that your company may have hired or lost employees throughout the policy term. You may also have created new positions or deleted previous positions. Workers may have been promoted or transferred to another position. Any of these things could impact your premium, causing it to go up or down.
By doing an audit, you can be sure that your workers’ compensation premium accurately reflects the status of your employees.
Why Is a Workers’ Comp Audit Needed?
A workers’ compensation audit has two purposes – to make sure your employee data is current and to ensure you are not paying too little or too much for your workers’ compensation insurance.
The insurance company requires you to make accurate records and keep employee information up to date. It benefits your company to do so, as you will only be paying for the exposures you had – not more and not less.
Another issue insurance companies are concerned with is how many subcontractors you hire and whether they have their own liability insurance. The reason for this is that the insurance company may have to pay a claim involving bodily injury or property damage caused by a subcontractor if they do not have their own liability insurance.
Overall, a workers’ compensation audit benefits the business and the insurance company equally.
What to Expect During a Workers’ Comp Audit
How can you get the best outcome from a workers’ comp audit? The best approach is to take the time to understand the process, ask questions along the way, and take it step-by-step.
Here is a snapshot of each step in the process:
- You will receive a notice for an audit approximately three months after your workers’ compensation policy expires. It is best to respond to the notice and schedule a time for the audit as soon as possible.
- The auditor may allow you to do the audit over the phone. Alternatively, they will mail you the forms to fill out, or they may arrange for an in-person audit. An on-site audit can take place at your place of business, your accountant’s office, or another mutually agreed location.
- At the scheduled time, the auditor will ask to see records showing how many employees you have, what positions they held, and whether you hired any subcontractors over the year. They will also want to know how much of your payroll is allocated to each employee. You will put all this information on an audit worksheet for the auditor to review.
- If the figures have not changed, the audit is complete, and your premiums will not change.
- If the figures have changed, the insurance company will issue a policy change which is called an endorsement.
- Shortly thereafter, you will either receive an invoice for an additional premium or a refund which reflects the difference between the premium you already paid and what the premium should have been.
Feel free to ask the auditor any questions you may have during the audit.
Tips for a Productive Workers’ Compensation Audit
As the day of the audit appointment approaches, you can do several things to prepare for it, so all goes smoothly.
The following checklist will assist you in the tasks you need to do:
- Keep records in accordance with generally accepted accounting principles (GAAP)
- Gather the last four quarterly IRS 941 forms
- Get copies of any 1099s your company issued
- Have your payroll reports ready, and be sure they show the names of employees and their job duties, the states they worked in, and the gross payroll for the policy term
- If applicable, list overtime, rewards, tips, severance, officer exemptions, and payments for active military duty separately
- List the names of all officers and owners, along with their job duties, gross payroll, ownership percentage, and how many weeks they worked
- List all subcontractors, along with their job duties and payroll for the policy period, and gather copies of Certificates of Insurance
When you have checked each item off your checklist, you can go into your audit appointment confidently.
Now that you know what to expect during a workers’ comp audit, you should have no difficulty preparing for the process. If you need further information about workers’ compensation or are looking for a quote, give Leap Carpenter Kemps a call today at 209-384-0727, and one of our agents will be happy to work with you.
Free eBook: Workers’ Comp Cost-Cutting Strategies