Premium Audit Payroll Figures More Critical Due To COVID-19

September 10, 2020 By JL Risk Management Consultants

Premium Audit Payroll Numbers Now More Important Than Ever

Why is the Workers Comp Premium Audit payroll accuracy more important in 2020? Yes, the COVID-19 pandemic may reach into your premiums more than you or your company may have anticipated.

picture of savings bond premium audit payroll figures

Let us look at the basic components of your Experience Modification Factor – the Worksheets you should be receiving from your agent or rating bureau.

Basics of The Experience Modification Factor Formula

You do not have to figure it yourself – as the savings bond picture says – you may only need to understand how a heavy reduction in payroll can increase your Experience Mod.

Experience Mods have a lookback period of three years. The last policy year and associated claims will not show up anywhere in your Mod sheets – one of the basic rating rules.

Yes, I do realize the Rating Bureaus are changing some of their rules to aid companies with the COVID-19 pandemic. What I am covering will not change for the most part.

For example:

Policy renewal January 1, 2022 – remember the workers comp rating algorithm is a delayed system.

The 2021 policy and claims will not show up anywhere (could be the post-pandemic recovery period?).

Payroll – these are from a worksheet I am currently reviewing and forecasting.

Policy Dates	Payroll	Claims – Total Incurred
1/1/2018 – 1/1/2019	$ 2,634,000	323,000
1/1/2019 – 1/1/2020	$2,874,000	292,500
1/1/2020 – 1/1/2021	$450,000	102,000

Unfortunately, the payroll had fallen – the class codes stayed the same- in other words, the company shrank but did not change during the pandemic.

I will spare you cranking the formulas through with a ton of numbers in this article. Think of higher payrolls being able to absorb the risk. The premium audit payroll numbers are reported directly to the rating bureau.

The $450,000 looks out of place. Why? Unless the employer had a very bad year the $102,000 in total incurred for the 2020 policy year looks high or were the payroll figures not reported properly?

The Mod in this situation will likely tick up. The $450,000 is not enough to cover the 102,000 in losses.

Wait – I thought lower Premium Audit Payroll Figures saved my company premium

Well, here is the “catch” on that one. Many of our client employers bid on large private or governmental contracts. If the Mod is above 1.0, you are out in the cold. I always advised the Risk Managers over these contracts to allow a little leeway. Allowing an employer with a 1.0 Mod or higher to bid has become rarer each year.

Temp-to-perm employers now see the 1.0 requirement more often.

Bottom Line – you want accurate numbers on your Mod sheets including the premium audit payroll info.

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Are Telephonic Payroll Audits Legitimate- Reader Question

February 4, 2015 By JL Risk Management Consultants

Telephonic Payroll Audits Legitimate For Smaller Employers

Payroll audits, also known as premium audits can take many forms. Telephonic payroll audits have gained in popularity for smaller employers. There are different audit types such as:

Telephonic- yes they are legitimate but read on for more info
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Hybrid
Physical
Mail-in (Voluntary)
Estimated

Telephonic payroll audits are usually for very small employers. Many states have a minimum premium threshold which requires an in-person audit for establishing the proper premium.

Each state has its own specific rules on the minimum premium that would require a physical audit. For instance, as the reader is from California – the minimum rule from the WCIRB for payroll audits: (The 13,000 minimum premium was just changed from 10,000). This is a great example of the rules for most states.

Section VI

4. Audit of Payroll The audit and assignment of payroll shall be governed by the rules and classifications contained herein and the approved pure premium rates, subject to the following specific requirements:

a. The insurer shall audit the employer’s records for the purpose of determining the payroll in accordance with the

following (See Part 1, Section II, General Definitions, for the definition of “Physical Audit” and “Voluntary Audit” and Part 4, Section II, Definitions, for the definition of “Final Premium(s)”):

(1) Each policy producing a final premium of $13,000 or more shall be subject to a physical audit at least once a year. On policies subject to monthly, quarterly, or semiannual interim audits, voluntary audits may be accepted in lieu of interim physical audits. The last audit of the policy shall be a physical audit of the complete policy period.

(2) Each policy producing a final premium of less than $13,000 shall be physically audited at sufficient intervals to ensure determination of proper payrolls. For each policy that is not physically audited, a voluntary audit shall be performed.

Picture of Hand Presenting Payroll audits Concept

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(3) Each policy producing a final premium of less than $13,000 and developing exposure in a dual wage construction or erection classification that requires the regular hourly wage to equal or exceed a specified amount shall be physically audited, unless the policy is a renewal and the insurer physically audited one of the two immediately preceding policy periods.

(4) Notwithstanding the above, a physical audit shall be conducted on the complete policy period of each policy insuring the holder of a C-39 license from the Contractors State License Board. See California Insurance Code Section 11665(a) for additional requirements regarding the audit of C-39 license holders.

(5) In every instance, the audit report shall show the source or sources from which the payrolls were obtained. b. If a policy is not audited as required by this Rule, the insurer shall comply with the rules for reporting unaudited exposure on unit statistical reports found in Part 4, Section III, Rule 5, Estimated Audit Code, and Section IV, Rule 4, Exposure Amount, of this Plan.

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Payroll Audit vs. Workers Comp Policy Renewal Timing Conundrum

July 11, 2013 By JL Risk Management Consultants

Payroll Audit vs. Workers Comp Policy

Payroll audit vs Workers Comp policy renewal timing has been a controversial subject for many years. We received this question last week from an employer with quite a conundrum that happens to almost all Workers Comp policyholders. The question was:

Wikipedia commons – Kajmal

Why does the payroll audit occur after the policy renewal? We disagree with our Workers Comp audit and want to switch carriers. Our agent told us that we will receive a hefty penalty if we try to switch after policy renewal. Is this true? We are into our third month of the next year’s policy. This seems to be unfair and almost binds us to another policy without knowing the true cost of the first policy.

Your question is one we see the most often from our blog readers. The timing of a WC policy does cause a problem for a large number of policyholders. The short rate penalty is the reason your agent recommended not switching policies mid-term. That was smart advice.

Woman Carrying Folder Payroll Audit vs. Workers Comp Policy Documents

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The conundrum is that an audit cannot occur on the day of policy expiry. That would be very burdensome on your company to provide records for payroll that just occurred the previous day. The usual schedule for a premium or payroll auditor is to audit the business books 30 45 days after the policy has expired – in most cases. That gives the employer time to organize their records.

Most insurance carriers will send out the premium audit bill within 15 – 21 days after the premium audit. The schedule results in the receipt of the premium audit bill along with the audit results at 60 days into the policy. Your company would then have to pay the audit bill within 10 days or dispute it.

I have never agreed with the 10 days to pay a large audit bill upon receipt of the bill. Most states and polices allow up to 30 days. Regardless, if you follow the 10 days to pay rule or not, you are at least three months into a policy with a carrier that you wish to not have for Workers Comp.

Woman Tensed Payroll Audit vs. Workers Comp Policy On Computer At Office Table

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Some of the questions I would ask you at this point are:

Is the audit incorrect or do you just disagree with it? Changes in business practices, new ownership, state law changes, etc. may have changed the “playing field”.
Did you dispute the policy and audit? If so, what were the results?
Are you willing to pay a large penalty to switch Insurance companies?
Have you had a premium expert look at your audit that you do not agree with overall?
Did you read your policy before disputing?
Did you have a very large increase in payroll?

Disputing an audit can create your own minefield, so to speak. You may actually cost your company more than the original audit.

The only solution I could ever come up with is to have a 90 day policy probationary period where no short rate penalty would apply if a company decided to switch carriers. However, the carriers would respond with very sharp rate increases as they would be on the hook for a claim that you for which no premiums were paid. In other words, I have not come up with a good idea, either.

The best way I have seen to resolve the matter is to do a well-informed audit dispute with information and numbers to back your dispute assertions. As distasteful as it may seem, you could switch carriers at renewal on your current policy in 2014.

If your company is in an assigned risk pool, switching carriers can be very close to impossible as there may be only one carrier covering your type of business in your state. This has happened more frequently in the last few years as many carriers do not wish to be assigned carriers.

Please remember when it comes down to the payroll audit vs workers comp policy, read over your policy before disputing the audit.

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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.

Picture Of Calculator And Payroll Audit Paper

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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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Payroll and Premium Audit Urgent Question – $85,000 Audit Bill

April 26, 2012 By JL Risk Management Consultants

Urgent Question – Payroll and Premium Audit

I received this urgent question on payroll and premium audit at 2 AM. The sender must have been losing sleep over it.

Picture of Sand Time Urgent Question Inside

We are now with a new carrier. Our Workers Comp Payroll Auditor came into our business four months ago. She went through our books and said everything looked good except for a few things.

We just received a bill for $85,000 with an overdue notice. We received no other warning and had no idea the bill would be so much. Our original Workers Comp policy was $105,000.

Should we just pay the bill as we are so late? How do we find out the results of the audit? Can we dispute the $85,000 bill? Should we contact the Insurance Commissioner? Please answer ASAP.

The insurance carrier will usually send the audit bill to the contact information they receive during the premium audit or the address on the policy. I looked up your company address and it is a PO Box. If you have a PO Box and the carrier sent it to your physical address, the bill and the backup info from the audit was likely returned to the carrier.

Your letter may have gone into a pile of returned envelopes at the carrier or will sometimes get lost in the mail. The carrier sent you the final notice by FedEx so it was delivered directly to your physical address.

The best way to find out the results of your audit is to immediately write the billing office noted on the bill. Send the letter certified return receipt. Explain to the carrier what happened and ask for a copy of the audit results and the auditor’s workpapers. Make sure you note that you receive mail at a PO Box.

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This previous article on your choices when you receive an audit bill may help you. Judging from the name of your company, it is likely you have hired subcontractors. That could be the source of the additional premiums.

Quite often, a new carrier will view your workplace differently than the last carrier. Your business may have added in additional employees which will cause a spike in your payrolls resulting in an increase in premiums.

A cardinal sin is to dispute a bill without a basis. Another cardinal sin is to contact the Insurance Commissioner’s office until all other means have been exhausted. This will harm the relationship with your new carrier and your agent even before your first payroll and premium audit.

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Davis-Bacon Act Wages Has Effect on Work Comp Payroll Audits

January 19, 2012 By JL Risk Management Consultants

Payroll Audits And Davis-Bacon Act Wages

My last post covered what is included in wages for Workers Compensation policies and premium audits. One of the areas mentioned was the Davis-Bacon Act wages.

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The Davis-Bacon and Related Acts, apply to contractors and subcontractors performing on federally funded or assisted contracts in excess of $2,000 for the construction, alteration, or repair (including painting and decorating) of public buildings or public works. Davis-Bacon Act and Related Act contractors and subcontractors must pay their laborers and mechanics employed under the contract no less than the locally prevailing wages and fringe benefits for corresponding work on similar projects in the area.

The Davis-Bacon Act directs the Department of Labor to determine such locally prevailing wage rates. The Davis-Bacon Act applies to contractors and subcontractors performing work on federal or District of Columbia contracts.

The Davis-Bacon Act prevailing wage provisions apply to the “Related Acts,” under which federal agencies assist construction projects through grants, loans, loan guarantees, and insurance.

For prime contracts in excess of $100,000, contractors and subcontractors must also, under the provisions of the Contract Work Hours and Safety Standards Act, as amended, pay laborers and mechanics, including guards and watchmen, at least one and one-half times their regular rate of pay for all hours worked over 40 in a workweek. The overtime provisions of the Fair Labor Standards Act may also apply to DBA-covered contracts.

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Payroll Audits Cover More Than Just Wages For Workers Compensation

January 12, 2012 By JL Risk Management Consultants

Payroll Audits Cover A Long List of Remuneration

The payroll audits cover of WC policy. One of the most trying times for a CFO or business owner in the Workers Compensation process is the payroll audit. I had a question posed to me yesterday as to what funds are considered gross wages under a Workers Comp policy. That was a good question.

Close up picture of Payroll Audits Cover money

Wikimedia Commons – Pen Waggener

I decided to list the usual payroll items that are counted during a payroll audit. Each state has its own list of items to be considered payroll. The following is a default list of the most common gross payroll items. Please note there are many exceptions to the list. This is not an exhaustive list – more of an example.

Wages
Vacation Pay
Sick Pay – not paid by a TPA
Bonuses
Holiday Pay
Employee contributions to a 401(k) or other deferred compensation plan
Employee contributions to a Section 125 Cafeteria Plan
Auto Allowances
Market value of lodging provided, i.e. free or reduced rent apartment
Value of free meals provided by the employer
Travel or “Show Up” pay
State Prevailing Wage fringe Benefits paid directly to an employee
Davis Bacon Wage fringe Benefits paid directly to an employee
Commissions
Payments for hand tools provided by the employee, either directly or through a third party

I know of some very strange items being counted as gross payroll. I have seen chickens and pigs being counted in certain situations. The Davis Bacon Wages come from an act established to pay workers a minimum amount on Federal and State contracts. I will cover Davis Bacon Wages in the next post.

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Payroll Audit Referred To As Premium Audit More Often

December 24, 2010 By JL Risk Management Consultants

Payroll Audit – More Used Term Premium Audit

A payroll audit for Workers comp is actually not a fully accurate term. The term also known as a premium audit. Actually, either term is correct. A payroll audit may also be called a policy audit.

Picture Of Woman Auditor Payroll Audit On Table

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This blog has provided many articles on the premium audit process. Feel free to search for the term premium audit or click here. The search results rank the relationship to the search words.

This is also referred to as a premium audit. Your policy contains a summary of the rules on when and how your company may be audited by your current or prior insurance carriers. Reading your policy before questioning or disputing an audit may save your company time and headaches every year. The premium audit workpapers may also be very helpful.

In Workers Comp the insurer will send an auditor (subcontractor or staff employee) to examine/audit the remuneration reported by the insured. The purpose is to determine if the premium is adequate and covers all employees. There are many posts in this blog on payroll or premium audits.

You may find them by using the search box on the right side of the web page. The key to any audit is having data to provide the premium auditor that is concise and complete. The payroll figure accuracy is tantamount to have a successful audit.

Microsoft Excel is always the best way to organize the data into nice spreadsheets. The premium audit department will usually send an audit notice letter approximately one month prior to the audit date.

If you cannot meet the auditor on the proposed date, call the audit department as soon as possible. Emailing the auditor remains the best way to reschedule a premium audit for documentation purposes.

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Workers Compensation Payroll Audits Accuracy – Huge Concern

February 21, 2009 By JL Risk Management Consultants

Workers Compensation Payroll Audits Shows Need For Better Forecasting

A huge concern for Workers Compensation payroll forecasting shows up very often when we assist employers with their premium audits.

Vector Graphic of Woman Huge Concern Raising Payroll cheque

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I had posted about this situation over the last few weeks. This situation is becoming a very urgent one as companies are trying to survive in this terrible economy. We have seen this happen over and over again lately when we conduct premium audits for employers.

I wanted to re-post over the concern we have with employers not accurately forecasting their payroll figures. The payroll figures are sometimes called remuneration. This can push a company to the brink of bankruptcy if not done properly.

The very bad economic situation we all are having to bear has caused many employers to layoff a large portion of their staffs. Some employers are just now making cuts to their ranks. Even if your company has not experienced any layoffs, an upcoming reduction may not accurately reflect your payroll figures for Workers Comp policies or audits.

Yes, the premium auditor will catch it at the end of the year with a refund or credit to your next policy. Do not let your premium auditor be the one to refund your company money at the time of the premium audit. You can do it on the front end of the policy.

Overestimating your Workers Comp payroll figures is the same as giving your insurance carrier a free loan of your funds for a year or more. It is recommended that just using last year’s payroll figures be avoided completely. We have seen companies harm themselves greatly due to not adjusting their future payroll figures to match their correct forecasted payroll.

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We are not advocating that any employer intentionally underestimate their payroll. We heavily suggest looking at each future payroll period to see if there will be any changes to those figures. You cannot ask for a refund from your insurance carrier mid-policy.

There are many options at the time of policy renewal that will enable your company to avoid this situation. If you need further info, please feel free to contact us. If you have already renewed your policy or are in the midst of a payroll and premium audit, I recommend that you begin to plan for the next policy renewal.

One thing I wanted to clear up is that we are not agents. We do not have any outside influences on what advice we give out to clients.

Red Flags You May be Overpaying Your Workers Comp Payroll Audit

December 15, 2008 By JL Risk Management Consultants

Your Workers Comp Red Flags Due To Payroll Audit

The red flags on your payroll or premium audit cause employers to email us very often. The following is a short list of what we have seen in client files nationwide when we perform audits for employers.

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After the Audit

Has your company experienced significant increases in Workers’ Compensation premiums (big audit bill)?
Has your company incurred charges for uninsured subcontractors or owner-operators?
Has your insurance company included in your payroll any owner-operator expenses?
Do your Classification Codes include “all employees” or “not otherwise classified” (NOC)?

Were your Insurance Company’s Workers’ Compensation Audits Conducted:

More than 120 days after the Policy Expiration Date?
Via telephone?
Using 941’s or state unemployment forms?

Did the Workers’ Compensation Auditor:

Not leave a copy of their Worksheets?
Ask very few questions?
Examine very few records?
Seem to be brief and superficial?

2019 update –

Did the auditor ask to take all of the records out of your place of business? Nothing in any of the rating bureau rules or the policy requires that the employer release any information for an offsite review. The choice remains up to the employer. The policy and rating bureaus require that your company provide the premium auditor with records for an onsite review.

It is a great idea to set aside time to review your Workers Comp premium/payroll audits and bills upon receipt. Ask questions if there is anything that looks out of place or seems to not quite fit with your Workers Comp policy. As the employer and insured, you have the most leverage before you pay the audit billing. Regardless of red flags or not, do not ignore the audit bill, as there are specific time limits to raising a dispute or paying the bill without penalty or cancellation.

Next Up – Self Insureds

Payroll Audit Date Most Important Date For Employers Premiums

December 13, 2008 By JL Risk Management Consultants

Your Workers Comp Premiums – Payroll Audit Date

The payroll audit date comes around once a year. This date should be marked on all employer calendars.

Picture Calculation Workers Comp Premiums Payroll Audit Date with coins and form

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Your workers comp premiums center around a date that many companies ignore. In my last post, I pointed out that if your company has a policy renewing on 1/1/09, it is too late to worry about your E-Mod/X-Mod. Other than providing proper payroll forecasts for the 2009 policy year, there should be more of a concern for the upcoming 2008 policy year payroll audit.

The payroll audit should occur within 60 days after the policy expiration date.

Regardless of what is in your original policy for 2008, the payroll audit is the judge and jury on this policy. The payroll audit usually occurs approximately 30 days after the 2008 policy year ends. The original 2008 policy can be altered in many ways resulting in a much more expensive policy than anticipated. We receive many calls and emails just after a payroll audit and billing was just completed.

If you receive an audit bill, you have the right to an explanation of all increases in your original premiums. Do not refuse to pay the audit billing unless there is a legitimate dispute with the payroll audit. Many states give the insurance carriers the right to immediately cancel the current Workers Comp policy if a employer does not pay an undisputed audit billing. We sometimes see where our clients have disputed an audit only to find out their payroll had increased sharply, which will result in a large premium audit bill.

Calculating Workers Comp Premiums Bills Image

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I will cover the Red Flags From A Payroll Audit next time. Many companies expect their policy to determine their workers comp premiums. A company really needs their efforts to center on the premium audit date. This will enable to the company to pay the correct workers comp premiums from the premium audit bill.

Payroll (Premium Audits) – Mother Of All Workers Comp Budget Busters

November 13, 2007 By JL Risk Management Consultants

Three Types Of Payroll (Premium Audits)

Payroll (Premium Audits) – the mother of all Workers Comp budget busters. There are three kinds of Premium Audits – also called Payroll Audits.

Usually, the audit is conducted within 60 days after the end of a policy period.

There are three types of premium/payroll audits:

Chicklet - currency Payroll (Premium Audits) coins and dollars

Wikimedia Commons – U.S. Department of the Treasury

Self-Reporting – the employer faxes, calls in or electronically reports the payroll. Danger – how do you know what classification code each of your employees falls under for reporting purposes? You may be overpaying your premiums. Check your Work Comp insurance policy – are the job types in your company described by your Classification Codes? Are you sure there are not certain discounts that apply? Quite often, you may not have an agent. Ask questions now or you will pay more later. Self-reporting may be of great convenience but you must understand that there are over 600 different classification codes for a business’s employees to fall under for reporting purposes.
Phone Reporting – The Workers Compensation insurance carrier will call you directly, or your accountant or some other outside financial consultant to obtain your payroll information. See #1 for the dangers of this type of reporting. Has anyone from your insurance carrier seen your operation? Most likely not at all. Are there certain mandated discounts that you are not receiving? Once again, you may not have an agent. Even if you do, only YOU know the business that you are in and the type of work that your employees perform daily. Once again, ask questions now or pay later. Do you have updated job descriptions for your employees? Have you expanded into other services over the years? Did you base your classification codes on your SIC code?
This one causes special concerns. I will cover it in the next posting.

#3 and The Insurance Premium Auditor – who exactly are they and what is their role?