Workers' Compensation Exclusions

What is a Workers' Compensation Exemption?

Each state sets its own rules for when and how some owners can waive or opt-out of a workers comp policy. Some of the factors used to determine the exclusion rules include the entity type, the industry, the percentage of ownership in the business and the number of business owners. Some states have very clear rules thar are easy to follow. Other states require notarized documentation to be filed every year at renewal. Exemption rules generally have a default status indicating whether an owner would be automatically included or automatically excluded, depending on the above factors.

Owner Inclusion and Exclusion Rules Vary by State

In most state, executive officers of a corporation are automatically included under a state’s workers compensation act by default. However, they may file for an exemption from coverage. Partners and sole proprietors are generally exempt from coverage under each states' act. They may elect to opt-in for coverage.

It is the responsibility of the business owner and/or their agent to determine what exemption options are available to the business owner(s) under each specific states' laws. This determination should be made prior to purchasing a policy. Failure to properly document an owners election or rejection of coverage will negate the owners desired intent and the automatic state rule will apply. The owners wages will be treated as if no election or rejection was made in accordance with state law, and premium be charged at audit. Many business owners overpay for workers comp insurance due to the incorrect documentation and proper filing each year.

How to be Exempt From Work Comp Coverage?

In many states, a signed Acord 130 form indicating the owners' exemption preference is all that is needed. This form simply needs to be sent to the insurance company when the coverage becomes effective. Your agent should send the form to the carrier and the carrier will notify the state. The process is repeated at each renewal.

In other states, the process of owner exemption or owner inclusion can be more complex and tedious for business owners.If certain owners choose to elect or rejects owner coverage, state specific forms are required to be filed with the state and/or the insurance provider. Some exclusion forms may even need to be approved by the appropriate state agency before becoming effective. If such an exemption or election is desired by a business owner, the appropriate forms and documentation should be forwarded to the insurance company by the agent prior to binding coverage. Otherwise, the payrolls for the owners will be treated as if no election or rejection was made in accordance with state law, and premium will be charged.

Agency producers and employers can avoid additional premium charges from their insurance carrier by completing these election or rejection forms with the application for insurance. Without the forms, insurance companies will generally charge premium for owners even if the intent was to elect or reject.

States That May Require Special Exemption Forms or Inclusion Forms Include: (Links to State Exemption Forms)

Owner Minimum and Maximum Payroll Limits

Each state also set rules for owner and officer payroll minimums and maximums for workers' comp rating purposes. Sole-proprietors and partnership often have a set payroll amount that must be used to calculate premium for the owners who are not excluded, or exempt, from coverage. Officers and LLC members generally have a minimum payroll amount that can be used as well as a maximum payroll that can be used for premium calculations.

Minimum and maximum payrolls used to calculate premium for owners does not have an effect on the medical portion of coverage. Medical is paid for by the carrier regardless of the amount of payroll used to calculate the cost of coverage. However, any short-term or long-term disability payments are determined by the owners average payroll wages prior to fling a claim for short-term or long-term disability. A higher payroll provides a greater amount of wage replacement if a temporary or permanent disability occurs. Most states require insurance companies to pay two-thirds of the average wages used to calculate the policy premium for owners.