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How to avoid overpaying on your Workers Compensation audit

By April 7, 2022April 18th, 2022Business Insurance
Copyright: rostislavsedlacek

Workers Compensation Insurance Audit

Most workers’ compensation policies are based on payroll. When the policy starts, you provide a payroll estimate for the coming year. Then at the end of the policy, payrolls are verified with an audit. If your initial estimate was high, then you’ll get a refund. But if you estimated too low, you can expect a bill.

If you have workers comp, then you can expect an audit.  The purpose of this post is to help you avoid overpayment because of your audit.

How are audits conducted?

This will depend on your insurance company.  They all handle audits a little different.  It may be as simple as completing a form online or through the mail.

Or your insurance carrier might request an in person audit.  If that’s the case, then you’ll get a call or email from the carrier or a third party auditor.  Don’t ignore that call! They’ll request a time to meet with you or your accountant to review your payroll record.  In person audits help ensure an accurate audit.  The larger your operation, the more likely you’ll have an in person audit.

Regardless of how your audit is conducted, make sure you comply and handle it in a timely manner.  The penalties for non-compliance can be steep.  Like real steep. $$$

What are they looking for in a workers comp audit?

I said before that workers comp premium is based on payroll.  True but, it’s a little more complicated than that.  Workers compensation is actually based on remuneration.  There’s a word you’ll  never need again.

You can think of remuneration as the total an employee could possibly lose if he or she can’t work. And that’s what they’re looking for in an audit.

Remuneration included in the workers comp audit.

  • Wages or salaries (including any paid retroactively)
  • Commissions (or employee commission draw, whichever is greater)
  • Bonuses, included stock bonus plans – unless the bonus is awarded for individual invention or discovery
  • Overtime (you’ll only pay premiums on regular time though)
  • Paid time off
  • Pay for time not worked (i.e., paid for an 8-hour day when only 7 hours worked)
  • Travel time
  • Employer payments required by law (i.e., Statutory insurance, Social Security, etc..)
  • Employer contributions required by a union contract (savings plan or vacation fund)
  • IRS Qualified Salary Reduction Plan (the employee’s contribution and any qualified agreement to pay into a plan in lieu of direct pay)
  • Employee Savings Plans (The employee’s contribution, but not the employer’s match.  This includes contributions to an IRA)
  • Pay for piecework, incentive plans or profit sharing plans, etc..
  • Payment or allowance for tools
  • Car allowance
  • Company housing or lodging and utilities provided
  • Meals (with exceptions)
  • Other forms of payment in lieu of money (gift cards, merchandise, store credits, etc..)
  • Expense reimbursements that aren’t substantiated by the employer’s records
  • Initial payment for filming a commercial, but not residuals

Remuneration that is NOT included in the audit?

  • Tips & gratuities. Although, if hourly pay plus tips do not equal minimum wage, the amount to make up the difference is included as remuneration in the audit.
  • Employer contributions to group insurance or pension plans
  • Invention or discovery rewards
  • Severance pay
  • Pay for those on active military duty (thank you for your service!)
  • Employee discounts
  • Expense reimbursements. But only if substantiated by the employer’s records.
  • Money for meals for overtime work
  • Work uniform allowance
  • Sick pay paid by a third party
  • Employer-provided perks (company autos, incentive vacations, memberships)
  • Employer contributions to salary reduction, employee savings plans, retirement or cafeteria plans

The Takeaway

That was a lot.  So let me summarize.

Workers comp is initially based on a payroll estimate.  Then at the end of the policy you get an audit that determines if you’re getting a refund (yay!) or a bill (boo!).

Your audit is mandatory.  Compliance is critical.  The insurance carrier can basically make up their own audit numbers and charge you if you don’t comply.  Get it done sooner rather than later.

Last, don’t pay more than you need to.  You can assume remuneration is part of the audit unless excluded above.  However,  pay close attention to the EXCLUDED list. If you’re not sure whether to report or not, consult your auditor. And you don’t get a medal for paying more workers comp premium than you have to.  Just a bigger bill.