No one likes the word “audit”. Even when it relates to an insurance policy instead of the IRS, an audit is not an enjoyable experience. Not every type of business insurance policy is auditable and not every insurance company performs audits consistently. However, workers compensation insurance will be audited every year almost without exception. Here some tips to make the workers compensation policy audits go smoothly.
Why are Workers Compensation Policies Audited?
Workers compensation insurance is rated by selecting a classification code appropriate to your operations, determining a rate for that classification code, and multiplying that rate times the total payroll for that code. Audits are necessary because traditional workers compensation policies are issued with an estimate of your annual payroll for each classification code. For most businesses, payroll is not a static figure and can vary greatly from one year to the next. The annual audit keeps both the policyholder and the insurance company honest and reconciled. If you over-estimated your annual payroll, the insurance carrier owes you a refund. Conversely, if your payroll was under-estimated, expect a bill for the difference.
Preventing Pain at Audit Time
The easiest way to prevent pain at audit time is to keep your estimated payroll current. You can raise, or lower, your estimated annual payroll at any time. In addition, many insurance carriers offer monthly reporting options instead of a fixed monthly bill. Essentially, monthly reporting means that you complete a simple audit of the prior month payroll and then remit payment based on actual figures. Monthly reporting is a great option when your payroll fluctuates greatly from one month to the next, typical of contractors. If your payroll is fairly stable then monthly reporting might be unnecessary.
In addition, keep the following tips in mind to keep an audit simple:
- Keep accurate records using a quality accounting or payroll processing software. Have payroll reports prepared that match the audit period. Separate overtime, vacation and other benefits paid from regular salary and wages.
- If you subcontract work, make sure you have certificates of insurance on file showing active workers compensation coverage. Subcontractors are rated as employees unless you can prove they have workers compensation insurance of their own.
- Know and understand what each employee does and be prepared to explain those job duties to an auditor. Keep in mind that if employees fulfill several job functions, they will usually be assigned to the highest rated class code.
- Do not argue with an auditor. Instead, make notes about things you disagree with, such as classification codes, and discuss them with your agent later. You or your agent can dispute the audit later over the disagreements.
Lastly, if you need help with a workers compensation audit, call the professionals at Safeguard Insurance. Even if we did not provide your Nevada workers compensation insurance, we can help you complete the audit or resolve any problems with the insurance company.