Archives for February 2013

California – WCIRB Upcoming Meeting Will Affect Certain Employers

February 28, 2013 By JL Risk Management Consultants

WCIRB Upcoming Meeting Will Affect Certain Employers Heavily

The upcoming meeting of WCIRB in California may be one to mark on your calendar if you own one of the below listed companies. The WCIRB may change some classification codes depending on a meeting on March 5th. The WCIRB is California’s rating agency for Workers Compensation. I usually do not point out any meetings of the rating agencies. The meeting is open to the public.

This is the meeting reminder –

The first 2013 meeting of the WCIRB’s Classification and Rating Committee will take place on March 5, 2013 at the WCIRB office in San Francisco. The Committee will review planned changes to the WCIRB’s regulatory filing schedule for 2013, as well as review several WCIRB staff recommendations for changes to the California Workers’ Compensation Uniform Statistical Reporting Plan – 1995 .The classification code changes will affect these employers:

Contractors — Construction or Erection

Day Care Centers

Mechanized Tree Harvesting and Log Chipping

Parcel Delivery Companies

Pipe or Tube manufacturing — Riveted or Welded

Sheet Metal Products Manufacturing and Metal Stamping

Stores — Repair Departments

Weighmasters and/or Dispatchers

Weight Control Institutes, Salons or Clubs

The proposed changes can be found here at the WCIRB’s website. The link will download a large PDF file. The WCIRB Committee will also cover:

Policy Number

Reinstatement of Cancelled Policies

Self-Insured Data for Experience Rating Purposes

Any of these changes may not be a negative factor for employers. If you are one of the affected employers, then a review of the PDF file may be worth your time.

I have attended many WCIRB conferences/educational programs. They are truly a great group of people for the most part.

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Medical Fee Schedules Virginia Inaction Cost Employers 13%

February 28, 2013 By JL Risk Management Consultants

Medical Fee Schedules – Virginia Legislature Moves On To Other Things

Virginia’s decision on medical fee schedules will cost the state’s employers dearly. The Virginia State Legislature decided to not act on fixing their Worker Comp medical fees. As I pointed out in previous posts, Virginia is one of the few states without a true pure medical fee schedule.

Graphic of form pill up by man hand Medical Fee Schedules Health Insurance Claim Form

The state is one of the better ones for Workers Compensation rates. However, there is still room for improvement. As with all states that do not have fee schedules, the majority of the Workers Comp claims value is higher than states with fee schedules.

The % is surprising for Virginia – one of my favorite states. According to the venerable NCCI, 64% of Virginia’s Workers Comp claims cost is due to medical treatment.

In VA’s neighboring states, the % of medical vs. indemnity is 51% of claims costs. That 13% extra has an element of very bad timing as employers are wrangling with the Obamacare mandates.

A great example of what happens when fee schedules are initiated is the state of Tennessee. Their Workers Compensation costs dropped dramatically after a fee schedule was legislated into existence.

How does a state legislate in a fee schedule? They can take a copy of North Carolina’s or Tennessee’s and it is a done deal.

Virginia has always been on the cutting edge in technology, colleges, wineries, and of course, has a large amount of influence from DC in the northern part of the state. They dropped the ball on this one.

One of the reasons/excuses you will hear is that medical practitioners will not see Workers Comp patients. To that, I say BULL.

I have advised on Workers Comp policies in every state in the Union and have never seen this happen. Workers Comp pays well for medical treatment.

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Sequestration – Any Effect on Workers Comp?

February 26, 2013 By JL Risk Management Consultants

Workers Comp Sequestration

The Sequestration has made the rounds in the press as almost a doomsday scenario. Is there going to be any lasting effect on Workers Comp if the imaginary fiscal cliff is reached?

Workers Comp Insurance Sequestration Graphic

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Workers Compensation insurance profitability has centered on long term investment returns by the insurance carriers. As long term investment has suffered, the losses on Workers Comp have been diluted by writing a “full package” of coverage. Insurance carriers can then take the “WC hit” by not underwriting Workers Comp as a standalone policy.

Companion Insurance is a perfect example of very conservative underwriting. Companion decided a few years ago to stop writing Workers Comp as a standalone product. Best Insurance Ratings gave them an A (Excellent) with a stable outlook two weeks ago. The strategy seems to have worked on at least a medium-term basis.

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Most insurance carriers have followed Companion’s example of not attempting to be profitable by writing just Workers Comp coverage. Most carriers are losing approximately 10 cents for every dollar underwritten in WC.

The sequestration is a short term problem at its worst. Workers Comp is a delayed system where the true profitability/loss on a policy is not seen for up to four years in the future. The sequestration will likely just be a radar blip when examined from that far into the future. If the sequestration was a planned series of events, then the insurance markets would show an effect.

The one area of concern may be if a policyholder is renewing their Workers Compensation policy during the next few weeks. As the sequestration is a short-term malady, the insurance and financial markets may show a moderate amount of stress for the next month.

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Self Insureds – Do You Know If Your Excess Insurer Has Been Notified?

February 26, 2013 By JL Risk Management Consultants

Self Insureds Need To Monitor Excess or Reinsurer Notification

Do you know if your self insureds has been notified? Workers Compensation excess insurance (reinsurance) can often go unnoticed in all the inner workings as a file progresses towards its conclusion. A reinsurer denying coverage because they were never put on notice is very rare for Workers Comp.

House of fire Self Insureds insurance association

Wikimedia Commons – Laima Gūtmane

A recent article where the underlying insurer sued their excess insurer pointed out the “rock and a hard place” the excess insurer is placed in when it has no knowledge of a claim that may require payment. Most liability insurers are very careful when it comes to reporting claims that may reach above the primary insurance level.

For instance, an example of where a self insured employer may end up paying out of pocket:

Employee has serious injury
Total Incurred (Reserves + Paid) is set at $295,000.
Small paid amount = $17,400
Reserves are above the reinsurance reporting threshold of $200,000
Overloaded TPA claims adjuster and supervisor do not report claim to reinsurer
Three years later, settlement is recommended that will cause the total claims payout to exceed $300,000.
TPA decides to report to reinsurer at this late date
Reinsurer is not happy as they were not involved in negotiating the settlement
Reinsurer should have had an initial status from the TPA three years ago when the Total Incurred exceeded $200,000

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Which party has the ultimate responsibility? The responsibility is with the employer. Of course, the employer could pursue the TPA.

How does a self insured employer avoid this situation? The avoidance mechanism should already be in place. When the TPA contract was agreed upon, were there reserve levels that should have the employer’s approval before the increase by the TPA?

Self insured employers will often remark that the “reserves are not that important” as we do not pay premiums. That may be true, but Workers Comp reserves can also be used as an alert when they reach certain levels – one of them being the reinsurance reporting level.

There are some TPA computer systems that will automatically report a claim to the reinsurer when the reserves reach a certain level. The reinsurer will usually ask for a full report once the TPA system flags a certain claim.

Reinsurers have become more analytical and not just an insurance commodity. Denials of coverage by the excess insurers may become more commonplace.

©J&L Risk Management Inc Copyright Notice

Payroll Audit Increased Policy Cost By 150% – Five Scenarios

February 21, 2013 By JL Risk Management Consultants

Payroll Audit Increased Policy Cost Significantly

Below are five scenarios why your payroll audit may have increased policy cost.

I received this question earlier this week from a California . A related question on policy premium is here.

We had switched agents and carriers as our company was offered a very low policy premium as compared to our previous agent and carrier. We just had our audit and our premiums increased from approximately $125,000 to over $300,000. How did this happen?

The money that your company paid the agent at the inception time of the policy is referred to as a deposit premium. The deposit premium that you pay upfront has little to do with what your company will finally end up paying in premiums.

The basic definition of deposit premium is the amount your company must pay at the start of the policy to the carrier for your company to be accepted as an insured.

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Properly budgeting for a Workers Comp paid policy (deposit premium and audit premium) is sometimes not an easy task. The easiest way to start is by:

Reviewing what you paid last year in premiums. If your company did not change that much from the previous year, did your company actually expect a $175,000 discount? Premiums among carriers vary some, but not that much.
Accounting for any payroll changes – this is a popular scenario – if your company was very successful and your payroll increased by a large amount, you should expect some type of increase at premium audit.
Company changes such as layoffs, purchasing new companies, or change of ownership. Major changes to your company will usually have an effect on your Workers Comp premiums
Workers Comp law changes – This is not as common, but can have a very large effect on premiums. An example is when West Virginia changed from a monopolistic state to an open market system.
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Analyze loss runs – if you had at least one or more bad claims years, your E-Mod can increase significantly in the next year.
Bonus – Analyze NCCI or State Rating Bureau Ex-Mod sheets – your E-Mod/X-Mod is basically a multiplier of risk. If you have a high E-Mod, then any premium increases at audit can be significant. For example, having a .8 versus a 1.2 E-Mod is a 40% swing in premiums. This is one area “that sneaks up” on employers. You can actually know what your E-Mod is 6 months before policy renewal and/or 3 months before the rating agency publishes your E-Mod.

The deposit premium that you paid is just to get your company insured under an applicable Workers Comp policy. There are no rules on how much the deposit premium should be from year to year. It is whatever the carrier will accept upfront to write you a policy. I have seen policies where the deposit premium was $850 and the total amount owed at premium audit (payroll audit) was in excess of $300,000.

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Staci Meyer Named New Chairwoman of NC Industrial Commission

February 20, 2013 By JL Risk Management Consultants

Staci Meyer Named New Industrial Commission Chairwoman

Governor Pat McCrory very recently appointed Staci Meyer as Chairwoman of the NC Industrial Commission. She replaces Pamela T Young, who resigned in January of this year.

Badge of Staci Meyer North Carolina Industrial Commission

ccms.ic.nc.gov

A short bio on Chairwoman Meyer:

She earned an undergraduate degree at Clemson University in 1983 and a J.D. degree from North Carolina Central University School of Law in 1990.

Her previous work experience includes:

Acting Secretary for the North Carolina Department of Cultural Resources

Chief Deputy Secretary and General Counsel for the North Carolina Department of Cultural Resources

Special Deputy Attorney General for the North Carolina Department of Justice

Research Assistant for the North Carolina Court of Appeals.

She is a member of the North Carolina Bar Association, Wake County Bar Association, and Tenth Judicial District Bar.

As a side note, The Senate passed a bill recently would dismiss all Industrial Commission members and let McCrory make his own picks. The Governor seems to have made his first choice.

Hopefully, one of the first items on her agenda should be making sure that ALL employers that are required to have Workers Comp insurance by paring down the 30,000 + that currently have no coverage.

©J&L Risk Management Inc Copyright Notice

North Carolina State Auditor Expected Results @ NCIC

February 19, 2013 By JL Risk Management Consultants

North Carolina State Auditor Finds Expected Errors At Industrial Commission

Workers Compensation uninsureds in North Carolina have been a hot button topic for many months since a newspaper reporter found 30,000 employers without coverage for their employees. A recent audit was released by the NC State Auditor’s department on this very subject.

The NC State Auditor found what was already in the press and on the mind of Governor Pat McCrory when he took office.

A summary of the findings:

Two sources available for data to cross-match are the Employment Security Commission and the NC Rate Bureau
During the audit was when the Industrial Commission started to obtain data from the two aforementioned sources
The NC Industrial Commission did not follow up on the data they were provided by the NC Rate Bureau previously – 11,323 businesses had let coverage lapse in 2012. The Industrial Commission followed up on none of these.
In 2011, $79,025 was assessed in penalties of which $59,925 was collected.
In 2012, $6.5 million was assessed of which only 2% had been collected.
In comparison, South Carolina had collected 75% of the $2.8 million in fines assessed.
The North Carolina School State School System would have received the fine money if properly assessed and collected.
Wikipedia – Press Service of the President of Russia

In the Industrial Commission’s response, one of the recommendations was to contact states with data matching program. West Virginia was very successful in its fines and collection procedures. West Virginia even posted signs at the businesses or work sites that the employer did not have a policy or other type of coverage.

A good recommendation would be to use Microsoft Access for the data matching. Excel reports could be pulled once the data is converted to a usable database. Is that something the new state agency GBICC (see last article) could do to provide this data? Possibly Is the data matching that hard to accomplish in a short period of time? No.

©J&L Risk Management Inc Copyright Notice

North Carolina Workers Comp Info – Shared Between Agencies By Creating Another Agency

February 18, 2013 By JL Risk Management Consultants

North Carolina Workers Comp Produces Another State Agency

A recent North Carolina House Bill (HB 112) seemed to cover the concerns that Workers Comp data is not being shared between agencies. This situation has been of great concern as 35,000 companies were found to be uninsured for Workers Comp by a newspaper reporter who compared the available databases.I noticed a term in NC HB 112 referred to as the GBICC . After further reading, I located a 66 page document by State Controller David McCoy on the GBICC. The GBICC is an acronym for the Government Business Intelligence Competency Center.

Picture Of Model House North Carolina On Roll Of Dollar

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The GBICC’s initial Workers Comp focus will be on employer’s compliance with insurance and employee misclassification. Misclassification refers to reporting employees as independent contractors to avoid paying Workers Comp insurance and the various associated employment taxes.

Misclassification does not refer to the classification codes that are assigned to each worker or job function at a certain business or organization (i.e. 8810, 7219)

The agencies specifically mentioned in HB 112 are:

North Carolina Industrial Commission
Employment Security Commission
NC Rate Bureau
NC Department of Revenue
NC Department of Labor

House Icon North Carolina With Hand Holding Magnifying Glass

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According to passage from the Controller’s report, the GBICC will work on key areas of program management to facilitate improved data sharing and analytics including:

Building consensus and agency “buy-in” for the emerging GBICC initiative to ensure that efforts are focused on appropriate priorities and adding value to the agencies
Establishing working groups of business stakeholders
Establishing a registry of available data for use by all State organizations
Establishing governance policies, procedures, and guidelines to broker data sharing agreements including the creation of a legal advisory group of subject matter experts on state and federal privacy, disclosure and security regulations
Establishing data and metadata standards based on national standards and industry best practices and determine how enterprise data model management and standards will be implemented

I will look over some of the other states’ methods of combining and analyzing employment databases for Workers Comp enforcement. I will post any interesting findings.

©J&L Risk Management Inc Copyright Notice

Insurance Policy Quote Something Does Not Seem Right

February 14, 2013 By JL Risk Management Consultants

My Insurance Policy Quote Seems Off

My Insurance Policy quote does not seem right. Workers Comp insurance quotes can cause a few sleepless nights. We usually get emails and calls right after an employer receives their quote for the next years’ WC coverage. This emailed question seemed to be different as the Workers Comp insurance quote seemed too low as compared to the previous year.

Graphic Of Mailbox Insurance Policy Quote With E-Mail Icon

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One would think the employer would be glad that their initial policy quote was too low. Carriers do have a limited amount of leeway in their WC insurance policy quotes. If an employer is not prepared budget-wise, a cash flow crisis can easily occur at the end of the policy year. Follow along with me on how this may occur in your company.

Your company receives a heavily discounted quote for Workers Comp coverage for the next year.
You write the check for the quote thinking your company has landed a bargain.
The Workers Comp premium audit occurs after policy expiry.
The premium audit bill is much higher than anticipated – however, the total bill (policy + premium audit) was not that different from the previous year.
Your company has 10 business days to pay off your audit bill.
You are unable to pay the large premium audit bill.
Your carrier decides to cancel you in the first few months of your next policy. Non-payment of premium often requires a grace period of no or a very few days.
You have to look for WC coverage in desperation mode.
One of the questions asked on your desperation mode policy application is have you been cancelled for non-payment of premium? Well, that just happened.
Carriers are very hesitant to underwrite your company as you do not pay your bills on time – see #9.
Some states will not allow you to enter their risk pool if you have unpaid premiums.
Your company faces massive fines for no WC coverage.

This happens more than one might think in the WC policy quote process. How does an employer avoid this situation?

Business People Insurance Policy Quote Paying Attention In The Conference

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The methods to avoid the situation are:

If it looks too good to be true, it probably is.
Look at your old policies – are there any major changes from the last three years such as a payroll reduction due to the economy, change of business practices, etc.?
Budget for the premium audit if you think a large bill is coming after the policy expires.
Make sure that you agree with the premium audit to the penny.
You can dispute the premium audit and bill. NEVER use disputes as a way to delay bill payment. There has to be a good justification for the dispute.
Look at alternative WC coverages that charge your company each pay period.

There are other methods to avoiding this situation. The main one is #1.

©J&L Risk Management Inc Copyright Notice

West Virginia Premium Auditor Charged With Fraud

February 13, 2013 By JL Risk Management Consultants

West Virginia Premium Auditor Colludes With Employer

A West Virginia premium auditor who had worked for Brickstreet was charged with fraud. Brickstreet had taken over the monopolistic West Virginia Fund in 2006. The auditor had worked for them since day one.

Wikimedia Commons – Government of West Virginia

Please note this is no reflection on Brickstreet as they were the one actually shorted on what amounted to millions of dollars in premium from employment agencies that provided employees to coal mines. All insurance carriers trust their auditors to the nth degree.

As I have posted very often in this blog, we review policies and audits for any overcharges that may possibly be refunded to employers. I have not seen a situation where the insurance carrier’s premium auditor actually reported artificially low numbers and received any type of funds from an employer.

A similar charge and conviction was brought against a “premium consultant” and a South Carolina company owner a few years ago.

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The names of the auditor and the companies involved will not be mentioned in this post. You may read further on the subject by clicking on the first link in this post.

There was no grand jury convened to charge the individuals involved with the fraud scheme. There seems to have been some type of plea deal reached as the charges were brought under an information document.

The West Virginia coal industry had been plagued with avoidance of premiums for many years. According to the WV Gazette,

“Before the system went private, the issue of workers’ compensation payments for coal contractors was highly controversial, with major producers allegedly creating a web of contract firms to avoid insurance premiums. A decade ago, a series of state lawsuits, backed by organized labor, forced the industry to pay back millions in workers’ comp debts.”

There may be some recovery of premiums from the auditor as “prosecutors are seeking to seize $415,000 they say is traceable to the crimes, including $226,000 in cash from a safe deposit box. The government also is seeking to seize a Dodge Ram truck, a Harley-Davidson motorcycle and a Yamaha ATV, court records show.“

Hand Presenting West Virginia Premium Auditor On Tablet Concept

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I have not really ever seen any instances of where an insurance company’s Workers Comp premium auditor had been bribed to keep an employer’s premium artificially low. Temporary employment agencies used to be the bane of the Workers Comp system by closing and reopening each year so that their E-Mods would stay at 1.0.

Rating agencies such as NCCI and many of the state-based rating agencies enacted rules that basically eliminated the repetitive open and closing of the same temp agency, but under a new name each time. Their E-Mods or X-Mods now follow them regardless of the name of the company.

All of our temporary employment agency clients are honest, hard-working people. I do not think the actions of a few should taint our view of a much needed service in this lagging economy.

Reinsurance/Excess Insurance Market Hardens

February 11, 2013 By JL Risk Management Consultants

Reinsurance Market No Longer Soft

The reinsurance/excess Insurance Market has started to change from a commodity marketplace. The excess insurance market is usually the bellwether for the rest of the marketplaces.

Picture of buildings Insurance Market place

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Reinsurance/Excess Insurance is basically defined as a risk management technique. The employer will purchase this type of insurance to cover claims that exceed a certain payout per claim or an overall claims total known as an aggregate.

According to a recent article in Business Insurance, the employers may not be able to choose their Third Party Administrator (TPA) and then just pursue the lowest priced reinsurance. Reinsurers are starting to use more predictive analysis when underwriting a risk.

Hand Pointing Towards Insurance Market Icons

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Insurance companies are not offering the same standalone product for reinsurance as in the past. The reinsurance/excess insurance market is now operating with ever-thin margins due to the return on investment the carriers are receiving for premium invested in stable investments such as money market funds.

The striking quote from article is that employers should expect a 10% increase in their excess insurance premiums. The other change is that re insurers are going to require employers to endure the same process as other insurance coverages.

The 10% increase is also for the employers with normal loss histories. Employers may see more severe increases with higher Mods or Loss Development Factors (LDF’s). The re insurers will likely analyze the same variables as normal Workers Comp carriers. One area that will receive more attention is whether or not an employer has a full safety and loss prevention program in place.

The one component that keeps the reinsurance market from actually being deemed hard is the availability of reinsurance. There are many carriers still offering reinsurance.

Experience Modification Factor (E-Mod/X-Mod) Question

February 7, 2013 By JL Risk Management Consultants

The Experience Modification Factor Basics

A great Experience Modification Factor Factor email came in last week.. Our E-Mod has changed a large number of times over the last year. Why does our E-Mod keep changing? How many times can an E-Mod change in a policy year?

Picture of Hand Illustrating Experience Modification Factor Concept

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I actually paraphrased the above question from a company that found us through a Google search. The employer operates in 11 states. This makes them subject to NCCI’s Interstate Mod calculations.

Without knowing more on the particular employer situation, I would say the following are some of the reasons for an E-Mod to be changed by NCCI:

Your annual Unit Stat Date – the drop dead date where the Total Incurred per claim is reported to NCCI or other rating bureaus. This is the original E-Mod publication date in most cases.
Current or prior carrier data change – if the carrier(s) reported correction information to the NCCI, then a new E-Mod may be published. The E-Mod may be unaffected from the original Unit Stat date reporting
Late reporting by a carrier – the instances where you prior or current WC insurance carriers report late data does happen. This will seldom change your E-mod. There have been cases where this has made significant changes to the E-Mod.
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State approval or changes to NCCI recommended rates – this can cause multiple changes to an E-Mod. We have seen instances of where there were more than 9 changes to a client’s E-Mod due to state changes reported to NCCI.
Premium Audit – some findings at your company’s Workers Comp premium audit may cause changes to your E-Mod such as more or less payroll, etc.

There are many other instances of what would result in an E-Mod change. NCCI or your state’s rating bureau may email or mail you each changes to your E-Mod even when your E-mod number does not change.

If for some reason, you are not receiving your E-Mod changes by NCCI or your state’s rating bureau, a phone call is heavily recommended. We have seen instances where the employer’s address is not a mailing address, but just the physical address. The other possible scenario is an outdated or improper email address.

Even though I only mentioned NCCI and E-Mods, the WCIRB is the rating bureau for Calfornia. They produce X-mods.

Workers Compensation Premiums – An Investment?

February 6, 2013 By JL Risk Management Consultants

Workers Compensation Premiums Are An Investment

Workers Compensation premiums of any type are almost always viewed as an expense. I actually changed my career path due to the question in the title. Workers Compensation premiums should be viewed as an investment, whether a company pays premiums or is self-insured.

Picture of Man Using Laptop Workers Compensation Premiums An Investment

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Mark Walls, who runs the Work Comp Analysis Group on LinkedIn recently wrote an article on the upcoming Workers Compensation changes in 2013. One of the passages in the article reads as:

If you get the time, the Work Comp Analysis group in LinkedIn is worth following on a weekly or daily basis.

I do hope that more companies will view Workers Compensation as an investment. The old “a penny saved is a penny earned” would be very applicable.

The return on investment (ROI) is that saving Workers Comp premium allows an employer to reinvest those funds directly back in their budget.

That is one of my reasons for changing my insurance education from a CPCU to a ChFC track. The ChFC curriculum allowed me to analyze insurance as an investment. Workers comp premiums that are treated as expenses get rolled into one expense category such as insurance program expense. Once employers begin treating premiums of any type as an investment rather than an expense, the justification for WC risk management techniques become much more valuable.

Once an employer sees workers comp premium as investments with the insurance carrier, safety programs then become a justified investment to make to save a company’s budget.

Employers that wish to reduce their future liabilities are willing to pay sums at the front-end of claims to avoid the “claims snowball rolling down the hill.” Loading up the risk management techniques at the start of a claim will always pay off in the long run by saving on workers compensation premiums.

Are Workers Comp Payments Taxable?

February 4, 2013 By JL Risk Management Consultants

Workers Comp Benefits Not Taxable In Most Cases

Are Workers Comp Payments Taxable In Most States? We receive many emails each month from employees and employers on this very subject.

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The tax liability of Workers Comp payments seems to ramp up this time of year when the tax filing season begins in earnest. One of our clients had fielded a question from an injured worker on whether or not they would owe taxes on Workers Comp benefits.

With so many new tax laws on the books, I thought I would go to the horse’s mouth, so to speak, and look up the IRS rule on Workers Comp benefits. The previous rules basically had said there is no tax liability for Workers Compensation payments to an injured employee.

For public employees, Publication 963 covers the subject:

Man Holding Workers Comp Payments Tax Paper

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Amounts received by police officers, firefighters, and other employees or their survivors for personal injuries or sickness incurred in the course of employment are excludable from income and social security and Medicare taxes if they are paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act.

This exclusion does not apply to retirement plan benefits based on age, length of service, or prior contributions to the plan, even if the individual retired because of an occupational sickness or injury.

Workers’ compensation benefits are fully excluded from gross income and are not subject to employment taxes, income tax withholding or reporting. Amounts received under a statute in the nature of a workers’ compensation act, however, may be subject to employment taxes and reporting.

For non-public employees, Publication 525 spells out the rule:
Amounts you receive as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act. The exemption also applies to your survivors. The exemption, however, does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.

If part of your workers’ compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. For a discussion of the taxability of these benefits, see Other Income under Miscellaneous Income, later.

Return to work. If you return to work after qualifying for workers’ compensation, salary payments you receive for performing light duties are taxable as wages.

Picture of Gavel Workers Comp Payments Court Room

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Disability pension. If your disability pension is paid under a statute that provides benefits only to employees with service-connected disabilities, part of it may be workers’ compensation. That part is exempt from tax. The rest of your pension, based on years of service, is taxable as pension or annuity income. If you die, the part of your survivors’ benefit that is a continuation of the workers’ compensation is exempt from tax.

The bottom line answer is they should not be included – except under certain circumstances.

Please note that this is for Federal Tax purposes. The states have changed the tax implications of receiving WC benefits over the years. Your state could possibly tax your benefits separately from the Federal tax system.