At LWG Insurance, we understand that managing workers’ compensation insurance can be a complex task for any business owner. One critical aspect that occasionally catches businesses off guard is the workers’ compensation audit. Here’s a comprehensive guide on what a workers’ compensation audit entails, why it’s conducted, and why it’s imperative to take it seriously.
What is a Workers’ Compensation Audit?
A workers’ compensation audit is an end-of-year review process where your insurance provider assesses your payroll records to ensure that you’ve paid the correct premium for your workers’ compensation coverage. This audit is not just a formality; it’s a legal requirement in many states to validate the accuracy of the payroll estimates provided when you initially purchased the policy.
How Does the Audit Work?
- Preparation: Before the audit, gather all necessary documentation such as payroll records, employee classification details, and any payments to subcontractors. This includes tax forms like Form 941, state unemployment tax returns, and sometimes even cash disbursement records.
- Audit Types:
- Physical Audit: An auditor visits your place of business to review documents in person.
- Phone or Virtual Audit: Information is shared via email or during a call.
- Self-Audit: You might be asked to submit documents online or fill out a form.
- Verification: The auditor will check:
- The accuracy of employee classification based on job duties (using class codes to determine risk).
- Actual payroll against the estimated payroll used to calculate your initial premium.
- Whether subcontractors had their own workers’ compensation insurance or if their wages should be included in your payroll.
- Adjustments: Based on the findings, your premium might be adjusted. If your actual payroll was higher or if there were misclassifications, you might owe more. Conversely, if your payroll was lower or if there were overpayments, you could receive a refund.
Why is a Workers’ Compensation Audit Conducted?
- Premium Accuracy: It ensures that your premiums reflect the actual risk and exposure of your business, safeguarding both you and your insurer from financial discrepancies. If you over-estimated your payroll for the year, you will get a premium refund back and if you under-estimated, an additional premium may be due.
- Compliance: Compliance with state laws and insurance regulations is mandatory, and audits help verify this compliance.
- Risk Management: By understanding your business’s operations better, insurers can offer more tailored coverage options for the future.
The Importance of Completing the Audit
- Avoid Penalties: Ignoring or not fully complying with an audit can lead to severe penalties. Most insurers, upon non-compliance, will process what’s known as a non-compliant audit. Here, they increase the payroll estimates by a significant factor, often 25% to 50% or more, leading to a large additional premium invoice. This can be financially burdensome and could even impact future insurance rates or coverage availability.
- Maintain Coverage: Non-compliance might result in policy cancellation, leaving your business vulnerable to legal action or fines if an employee gets injured.
- Future Premiums: Successfully navigating an audit can lead to more accurate premiums, potentially saving you money over time if your business operates with lower risk than initially estimated.
What Happens If You Don’t Provide the Required Information?
Failing to provide the necessary information during a workers’ compensation audit can have dire consequences:
- Non-Compliant Audit Charge: Insurers can estimate your payroll at a higher rate, which directly translates to a substantial increase in your premium. This non-compliance fee can be as much as 200% of your original estimated premium in some cases.
- Legal Repercussions: Beyond financial penalties, you might face legal issues for non-compliance with state regulations.
- Reputational Damage: Consistently failing audits can make you appear high-risk to future insurers, affecting your business’s insurance prospects.
Conclusion
At LWG Insurance, we are committed to helping you navigate the complexities of workers’ compensation audits. Ensuring you’re prepared can save you from unexpected costs and keep your business in good standing with insurers. Remember, timely and thorough cooperation during an audit isn’t just about avoiding penalties—it’s about understanding your business better and securing the right level of protection for your workforce.
If you have any questions or need assistance with preparing for your next workers’ compensation audit, please don’t hesitate to reach out to us.
