Prepare for a Workers Compensation Audit

When you purchase a workers’ compensation insurance policy, your insurer will estimate your exposure to workplace injuries. Your premiums will be set according to this estimate. However, after your policy expires, your insurer will audit your records for the year to determine your actual premiums. If necessary, you may have to pay more to make up the difference. You can prepare for this audit by gathering necessary records and appointing someone to respond to all the auditor’s questions. After the audit, review the auditor’s worksheets for errors.

Steps

Gathering Required Records

  1. Ask what you need to provide. You shouldn’t volunteer more information than requested.[1] For this reason, you should ask what documents the auditor needs to see and then gather those documents ahead of time.
  2. Collect payroll records. The auditor will probably request payroll records, so get these in order.[2]Generally, you must provide copies of the following:[3]
    • payroll journal and summary (payroll includes salaries, wages, commissions, overtime pay, and bonuses)[4]
    • state unemployment reports
    • individual earnings records
    • federal tax reports (941 reports)
    • your check book
    • all overtime payments (broken out by employee)
  3. Pull together your employee records. You’ll probably also need to provide detailed employee records, which you should pull together before the auditor arrives.[5] Find the following:[6]
    • number of employees
    • hours, days and weeks worked during the year
    • detailed explanation of job duties for every employee
    • breakdown based on dollar amounts if an employee works in more than one classification code
  4. Find your cash disbursements. You’ll need to present this information to the auditor, so find it ahead of time. Double check to make sure all numbers are accurate:[7]
    • payments to any subcontractors and independent contractors
    • materials
    • casual labor
  5. Gather your certificates of insurance. Depending on your state, you may be charged workers’ compensation premiums for independent contractors and subcontractors. You’ll want current certificates of insurance for every subcontractor you used during the policy period.
    • The certificates should state that workers’ compensation insurance is being provided. Some contractors have only general liability coverage without workers’ compensation.[8]
    • In some states, sole proprietors and partners can opt out of the workers’ compensation requirement.

Setting Up for the Audit

  1. Determine your type of audit. You might have one of two kinds of audits: a physical audit or a voluntary audit. You should know ahead of time which you will have:[9]
    • A physical audit involves an auditor contacting you by phone or mail and scheduling an appointment. They must contact you within 60 days of the expiration of your policy. You will provide the auditor with documents. The auditor is working on a deadline—usually thirty days once assigned your audit.
    • A voluntary audit involves you receiving a form in the mail from your insurance company. You must complete the form and submit it to your insurer. Although the forms are basic, you should call the insurer if you have any questions.
  2. Identify a primary contact. The audit will go more smoothly if your business designates a primary contact to work with the insurer. Make sure to choose someone who is familiar with the entire business. This person should also be familiar with payroll records.
    • This primary contact should be familiar with any prior audits. They should review the auditor’s worksheets and prior policies so that they are aware of the issues that can arise.
  3. Clear out a space for the auditor. The auditor might work off the premises. However, if they work in your office, then make a comfortable space for them to work. It should be well-lit and quiet.
    • Try to get the auditor to work on your premises. This makes sharing information easier, and you can provide as much detailed information as possible. It can be hard to share information when auditors work off-site.
  4. Review the original policy. This policy was based on an estimate. However, you should review the policy to uncover what was used to calculate your initial policy premiums. Consider the following:
    • Payrolls. Workers compensation rates are typically tied to your payroll. For every hundred dollars, you are charged a rate.
    • Rate. The rate will be based on the kind of work done. This work will be classified based on a classification system used to determine workers’ comp.
    • Classification codes. Not all work carries the same likelihood of injury. The auditor will determine what is the governing classification that generates the most payroll. However, some workers are given their own classification, such as clerical and outside sales people.
    • Experience modification factor. After determining the classification, the auditor multiplies the rate by your payroll. However, the auditor can adjust this amount based on your prior workers’ compensation history.
  5. Analyze public information about your company. Look at your website and see if there is any information there that is wrong. Your auditor will be reviewing all publicly available information about your business. You should correct anything that is inaccurate.

Handling the Audit

  1. Maintain a professional relationship with the auditor. The audit can be stressful because the insurer might drastically increase your premiums. You can make the process go more smoothly by always being friendly and helpful to the auditor.
    • Based on your policy, the auditor probably can request any financial document, such as tax filings. You should provide it promptly and without disagreement.
    • You would rather the auditor work with the accurate information than guess. When auditors guess, they provide “worst case scenario” information, which likely inflates your premiums.
    • You can typically expect to pay 25% more when you don’t comply with the auditor.[10]
  2. Review the auditor’s worksheets. Sometimes auditors make mistakes that benefit the insurance company (and hurt you). You should carefully review the auditor’s work after they finish. You will have to ask the insurer for copies of the auditor’s worksheets.
    • An insurer doesn’t generally offer these worksheets unless you ask.
    • Avoid signing off on any audit that is incomplete.[11]
  3. Compare the audit to the original policy. Sometimes, the audited premiums will be higher than the estimate you received when you bought the policy. You want to make sure any increase is legitimate. Look for the following:
    • Whether the experience modification factor is higher on the audit than on the original policy. It shouldn’t be.
    • If there are more expensive classification codes on the audit than in the original policy. Sometimes, your business operations change so these classifications will change. However, they generally shouldn’t absent a major change in your operations.
    • Whether the schedule credit or debit has changed. If so, you might be able to dispute the amount.
  4. Meet with an insurance attorney. If you have questions, then schedule a consultation with a lawyer. Show them the auditor’s worksheets and your original policy. Your lawyer can decide whether you have grounds for challenging the audit.
    • You can find an insurance attorney by contacting your state or local bar association and asking for a referral.
    • Call up and schedule a consultation. Make sure to ask how much it will cost.
  5. Dispute the audit. Your insurer should tell you how to dispute the audit determination. For example, you might need to submit records to the insurer within a certain amount of time. If you wait too long, then the insurer will probably assume you agree with the audit.[12]
    • Don’t delay. Call up your insurer and complain that you don’t agree with the audit. Ask what you need to provide and the deadline.

References

  1. ↑ http://workcompconsultant.com/prepare-for-audit.htm
  2. ↑ [v161791_b01]. 1 June 2021.
  3. ↑ http://workcompconsultant.com/prepare-for-audit.htm
  4. ↑ https://www.thebalance.com/preparing-for-a-workers-compensation-audit-4027576
  5. ↑ [v161791_b01]. 1 June 2021.
  6. ↑ http://workcompconsultant.com/prepare-for-audit.htm
  7. ↑ http://workcompconsultant.com/prepare-for-audit.htm
  8. ↑ http://workcompconsultant.com/prepare-for-audit.htm
  9. ↑ https://www.workerscompensationshop.com/workers_compensation_audit.htm
  10. ↑ https://www.workerscompensationshop.com/workers_compensation_audit.htm
  11. ↑ https://www.workerscompensationshop.com/workers_compensation_audit.htm
  12. ↑ https://www.ceiwc.com/i-am-an-employer/policy-information/premium-audit-process.html
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