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Twelve dos and don'ts of preparing for a premium audit


While an IRS audit strikes fear in the hearts of business owners, a Workers' Compensation premium audit is expected and viewed as routine. Yet, there is a very good chance that it can result in higher charges, particularly if you are not adequately prepared. Clerical errors, incorrect classifications, and miscalculations often lead to overcharges.

The premium for Workers' Compensation coverage is initially an estimate; the actual cost is determined through the audit. To be fair, an auditor's job is not easy; there are gray areas, audit departments treat the same exposure in different ways, and auditors are overworked and under intense pressure to do the audit quickly and efficiently. It's important to keep in mind that the auditor works for the insurance company and any unclear areas will favor the insurance company.

To avoid overcharges and unpleasant surprises, here are 12 dos and don'ts:

Dos

  1. Be prepared. The auditor will need all the necessary financial records to conduct the audit and may ask for a tour of the facility. Prepare a well lit and quiet place for the auditor to work and be sure that the financial records are complete and organized in a way that enables the auditor to complete the job as quickly as possible. A review of past audit work papers could be helpful to identify potential problem areas.
  2. Breakdown payroll records. While the types of breakdown may vary depending upon state statutes and industry, some common beneficial breakdowns are:
    1. Job classification. Job classifications are a key factor in Workers' Comp premiums. With the exception of construction and agriculture, the overall business operation, not individual duties, is assigned a governing classification that best identifies the type of work being performed. In most cases, this is the classification that contains the most payroll and the first critical step is to be sure that it's accurate. Since some workplace functions are common to all businesses, there are standard exclusions for clerical, clerical telecommuters, drafting, sales and driver classifications. Employers that take the time to place classifications into the payroll records provide helpful information for the auditor; however, many auditors will probe a clerical classification because it is usually the least expensive, reflecting minimal risk. Key determinants of a clerical classification are physical separation from the plant and exclusive performance of office work (non-clerical duties can be, at the most, incidental). To strengthen the choice of a clerical classification, it is helpful to add job titles for each employee that describe what people do, such as payroll clerk, data entry clerk, receptionist, etc.
    2. Overtime. In most states, overtime pay can be reduced to straight time when determining the Workers' Comp premium. Records should clearly document how much pay was overtime for the year. If the rate of overtime varies, for example, time-and-a-half and double time, be sure the records are distinct, as the adjustment will differ. This information should be in a form that is easily determined by the auditor, summarized by classification on an annual basis.
    3. Severance pay. Dismissal or severance pay, except for time worked or accrued vacation, is often excluded from remuneration. Employers need to show the auditor exactly what was paid in severance pay.
    4. Executive officers. Covered executive officers, individual owners, and partners are subject to minimum and maximum payroll amounts and are required to have a class code assignment based on their duties - they are not always designated as "clerical" employees.
    5. Multi state exposures. State laws and carrier contracts can limit or sometimes prohibit Workers' Compensation payments in a state outside of where the policy is written. Moreover, all states do not calculate payroll for premium at the same rate. This area is one of the most complex and it's best to seek expert advice if there are employees working in more than one state.
  3. Understand separation of payroll opportunities and requirements. In some cases, rules allow an employee's payroll to be divided over different class codes. Some states only allow its use in construction, while other states have broader applications. If allowed, detailed records of the specific hours worked for each Workers' Comp class code must be kept; percentages or estimates of this work are not allowed. Without adequate records, the entire payroll for the employee will be placed in the highest rated classification and payroll separation will not be applied.
  4. Know what is excluded remuneration. Excluded remuneration can include employee perks, work uniform allowances, reimbursed expenses, pay for active military duty, tips and other gratuities, special rewards for individual invention or discovery, payments into qualified third-party trusts for the Davis-Bacon Act, among others. To minimize your exposure, know the rules and exceptions and provide evidence or verification of the exclusion.
  5. Be sure certificates of insurance are current and complete. A certificate of insurance is a written assurance that subcontractors, temporary agencies or employee-leasing companies are providing Workers' Compensation for the entire period of time the contractor has worked for the employer. Be sure the insurance matches the requirements of the contract and has not expired or been cancelled. If proper certificates are not available at the time of the audit, the primary employer will be charged for the exposure on its Workers' Compensation policy. If there are uninsured subcontractors, the contractor shall provide a complete payroll record of the employees of each uninsured subcontractor. If payroll records are available, the charge will be based on the payroll, if not it will be based on the contract price.
  6. Assign a friendly and knowledgeable person to work with the auditor. A representative of the company familiar with both the operations of the company and the financial records should be present at every audit. The auditor will likely have questions and unless someone is there to answer them and explain the financial documents, the auditor may make some potentially costly assumptions and/or mistakes. This duty should not be delegated to any staff member not intimately familiar with the business and its finances.

Don'ts

  1. Be difficult or combative. Treat the auditor as a welcome guest.
  2. Let the auditor leave without getting a copy of the audit work papers. This will allow you to review the audit with your agent and confirm that there are no errors BEFORE the audit is processed and billed (fixing it "after the fact" is more difficult).
  3. Volunteer more information than asked. The auditor will ask questions; this is expected. Only answer the questions asked and do not lead the auditor down a path that may prove detrimental.
  4. Allow the auditor unescorted access to the premises. If the auditor wants to tour the facilities, be sure that the company representative is present. Employees may volunteer information that incorrectly impacts the audit; therefore, it is important to have the knowledgeable staff person involved in all conversations.
  5. Hire uninsured contractors. Auditors specifically look for uninsured subcontract labor when conducting the Workers' Compensation audits. Employers will be responsible for Workers' Compensation insurance for the subcontractors or independent contractors, unless there is a valid certificate showing that they carry their own Workers' Compensation insurance.
  6. Delay in disputing the bill. While it is best to try to resolve issues before the audit is processed and billed, it's not always possible or there may be discrepancies between the worksheets and the audit. There are time limits on disputing a premium audit bill and it's important that there be a strong, defensible position to contest the findings.

This audit flow chart will help you prepare for and increase the chances of a favorable audit. The best approach is to proactively develop a defensible position by preparing thoroughly and building an overcharge-proof audit package before the auditor arrives. We are available to help. As Certified WorkComp Advisors, we are trained to prepare employers for audits, spot errors and get them corrected.