Six tips for prepping for a premium audit

Since a Workers' Compensation premium is estimated initially, the actual cost is determined through the premium audit, which can result in higher and unexpected costs. The auditors' job is to find premium producing exposures; after all, they work for the insurance company.

Employers can easily be overcharged if they are ill prepared for the audit. When information is unclear, the auditor can make costly assumptions or deny legitimate deductions because of a lack of supporting documentation.

Here are six tips to help avoid overcharges on your audit:

1. Get organized

   Records should be presented in a way that makes the auditor's job easy. If the records are unclear, the auditor will default to the highest rated codes. It's best to prepare a trial premium audit before the auditor arrives. This involves working closely with your agent to organize payroll records in a way that accurately and strategically breaks down payroll to identify deductions such as (depending on your state law): overtime, severance pay, tips, active military duty, etc. It also means reviewing job classifications, gathering and reviewing certificates of insurance, check registers, tax reports and other pertinent documents.

2. Know how auditors review job classifications

   In most cases, 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. This is typically the classification that contains the most payroll and the first critical step is to be sure that it's accurate. There are nearly 700 classifications in NCCI states and the definition and scope can change.

   Given the fluidity of today's economy, auditors look to see if business operations have changed or if the business has expanded to other areas. Even if the business operations have not changed, there are still times when an auditor determines the classification code is incorrect. However, it's important to note that the auditor cannot add a higher rated code at the time of the audit unless there has been a change in business operations, misrepresentation or fraud. If the insurance company underwrote the risk at a lower code, a new higher code can only be added to the renewal policy. Agriculture, construction and staffing are exceptions to this rule.

   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.

3. Document excluded remuneration

   Not everything that is paid to employees is included in the Workers' Compensation calculation and excluded remuneration is a significant factor. The auditor is not going to search for it; it is the employer's responsibility to know and carefully document what can be excluded.

   There are at least 16 items that fit the definition of excluded remuneration, with the most common being overtime payments in most states (Pennsylvania is an exception). For example, if an employee makes $10 per hour straight time and works overtime at time and a half, the $5 per hour of additional wage is excluded from the calculation. To ensure that payroll is not inflated, this information should be in a form that is easily determined by the auditor, summarized by classification on an annual basis. If the auditor cannot readily break out the premium portion of overtime, then payroll will include the full wage.

   Other areas of excluded remuneration that are common sources of mistakes include:

   • 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.
   • Active military duty. If the employer pays employees when they are on active military duty, including the two-week National Guard service, pay can be excluded. It's critical that it not look like regular payroll.
   • Tips and gratuities. If tips are allowed on credit cards, they must be accounted for properly.
   • Employer-paid perks, such as automobile, airline tickets, incentive vacation, club memberships, property or service discounts, and event tickets.
   • Expense reimbursements to employees. Records and receipts must document that the expense was incurred as a valid business expense and be shown separately.

4. Understand separation of payroll opportunities and requirements

   In some cases, rules allow an employee's payroll to be divided over more than one class code. Some states only allow this 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 separately; 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, increasing costs unnecessarily.

5. Be sure certificates of insurance are current and complete

   Auditors will search the general ledger and match the certificates of insurance to the contract payments. If there is not a valid certificate of insurance, which is a written assurance that subcontractors, temporary agencies or employee-leasing companies are providing Workers' Compensation for the entire policy period, the auditor often uses the full contract price, thus inflating payroll. While the best solution is to obtain certificates of insurance, employers can minimize these charges by having a complete payroll record from each uninsured subcontractor so the charge will be based on the payroll, not the contract price.

6. Be helpful, but cautious

   The auditor is neither friend nor foe. Treat the auditor with respect, provide a well-lit and quiet place to work and assign a knowledgeable person to work with the auditor. 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 be delegated only to a staff member who is thoroughly familiar with the business operations and its finances.

   A few words of advice:

   • Answer questions, but don't volunteer more information than asked.
   • Don't allow the auditor to tour the premises unescorted. The auditor may want to view the operations to help in categorizing risk, however, the company representative should be present. Employees may volunteer information that incorrectly impacts the audit; therefore, it is important to have the knowledgeable staff person involved in all conversations.
   • If possible, schedule the audit for a Friday afternoon.

As Certified WorkComp Advisors, we are trained to prepare employers for audits, spot errors, get them corrected and we are available to help.