Workers' Compensation Audit

A work comp audit is the examination of a policyholder financial and payroll records after the expiration of a policy. This process is done to determine the accuracy of the estimated premium when the policy was started. The actual premium basis and class code exposures are reconciled after the policy expiration and measured against the estimates used to establish the original earned premium for the policy. A year-end final audit is really a verification of the payroll and subcontractor exposure to determine the final premium to be charged since the original quote was based on estimated payroll only.

Pay As You Go Workers' Compensation policies help reduce exposure to large audit balances because the premiums are based on actual payroll and they are reported/paid in real-time, verses traditional estimated direct bill programs used.

Audits are very common and typically conducted after each policy period ends or the policy expires. Once the audit has been completed, the insurance carrier will send a Final Audit Statement to the policy holder. This statement will indicate if any additional premium is owed by the insured or if any credits need to be returned or applied to the next policy. Typically, these credits or debits are caused by payroll adjustments made by the auditor when conducting the year-end audit. They may also be created when the auditor believes employees were incorrectly classified.

Workers' Compensation Audit Checklist

When preparing for your workers' compensation audit you should plan to provide the auditor with only those items they ask for. There is no reason to give them any more information than they ask for. Remember, the quicker an auditor can finish his job and move onto another audit, the better it is for you and for them. Here's some of the common reports and documents employers might need for a fast and smooth premium audit:

Types of Workers Compensation Audits

There are two types of workers compensation audits. A physical audit and a voluntary audit. Whether an insurance company performs a physical or voluntary workers compensation audit will depend upon the type and nature of your business operations and the size of the premium. More complicated businesses and larger premium sizes will usually require a physical audit rather than a voluntary audit:

Physical Workers Compensation Audit

A physical audit is performed at your place of business. It is typically requested within 60 days after the expiration of your workers compensation policy. The auditor will notify you by mail or by phone and schedule the audit appointment. Keep in mind that the auditor is on a time schedule. Most insurance carriers require them to return the completed audit within a 30 day time period once its been assigned. If the audit is not completed within the required time frame, the auditor must return it to the insurance company marked delinquent. This may result in a larger than necessary audit bill by the carrier and may not be based on accurate data because insurance companies will add and additional 25%, or more, to the original payroll.

Voluntary Workers' Compensation Audit

A voluntary work comp audit is done by mail. The audit form is mailed by your insurance company within 60 days after the expiration of your insurance policy. This form should be completed and returned to the insurance company as soon as possible. The form usually shows the classification codes as shown on your policy and asks you to verify the actual payroll exposures for each class. These forms are basic but they can be confusing for someone who has never completed an audit. The form may also request that you return other tax reports or related documents along with the audit form.

If you have questions about an audit form, it is best to contact the insurance company or agent for help. The information you provide to the insurance company will be use for finalizing your audit bill. It is important that you understand how the information you send back will affect the audit outcome and the final policy premium.

Workers Compensation Premium Audit Tips

Separate and summarize employee overtime paid to employees by job classification or class code.

• Premium on overtime wages are charged at a reduced rate.

Get current certificates of insurance for all subcontractors you paid during the policy period.

• Make sure each certificate proves the subcontractor had work comp coverage during the time of service to your business.
• If you can't provide a workers' comp certificate for each sub-contractor you will be charged premium for any money paid for work.

Separate employee payroll by class code

• Employee payroll can often be divided over different class codes if they perform multiple job duties. Accurate payroll records should be kept and reflect hours and work performed before a multi-class separation will be applied. This is called "Payroll Class Separation". Without adequate records, the entire payroll for the employee will be placed in the highest rated classification code.

Make the Auditors' job easy.

• Be prepared and have complete and accurate records available for review.
• Do not volunteer too much information. Just have straightforward and direct answers for the auditor's questions.
• Make sure an owner or a person knowledgeable about the business is available to meet with the Auditor.

It is always a good idea to engage the auditor during the audit process and review any worksheets they prepare. Do not sign off on incomplete audit worksheets. Ask questions about anything that may not make sense to you. Finally, ask to make a copy of the audit worksheet they prepare. It is not uncommon for auditors to make mistakes on the audit worksheets. Remember, they work for the carrier and most mistakes are in favor of the insurance companies. Audits are a contractual obligation within the workers compensation insurance policy. It is common practice for carriers to add an additional 25% to all estimated payroll figures when businesses fail to comply during the audit process. It is in your best interest to have a reasonable understanding of your work comp class codes, payroll, and subcontractor payments prior to any physical or voluntary audit.