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Remuneration: Inclusions and Exclusions*

I. Inclusions

a. Wages or salaries

b. Pay for holidays, vacation, and sick pay not paid by a third-party administrator

c. Bonuses - including stock bonus plans, except for inventions and discoveries

d. Overtime pay - less the premium portion (see below)(exception Pennsylvania and Delaware)

e. Commissions and draws against commission

f. Employee contributions to a 401(k) or other deferred compensation plan, even if pre-tax.

g. Employee contributions to a Section 125 Cafeteria Plan, even if pre-tax (exception: California)

h. Pay for time not worked, i.e. paid for an 8 hour day when only 7 hours worked

i. Employer payments of amounts otherwise required by law (i.e. Statutory insurance, Social Security, etc.)

j. Payment on any basis other than time worked such as piecework, incentive plans or profit sharing plans

k. Expense reimbursements to employees that were not a verifiable expense

l. Market value of lodging provided, i.e. free or reduced rent apartment

m. Value of meals provided by the employer

n. Pay for travel to and from work or to job site

o. State Prevailing Wage Fringe Benefits paid directly to an employee

p. Davis Bacon Wage fringe Benefits paid directly to an employee

q. Payments for hand tools provided by the employee, either directly or through a third party

II. Exclusions

a. Tips and other gratuities received by employees

b. Overtime. The premium portion of overtime is excluded. For example, if an employee makes $10/hr. straight time and $15/hr. overtime, the $5/hr. is excluded from the premium audit. This is the only differential that can be adjusted back to straight time. If there is a shift differential, the higher shift rate must be included. Delaware and Pennsylvania do not allow for the premium portion of overtime pay to be excluded.

c. Payments by an employer to group insurance or group pension plans for employees, other than those covered by Rule 2-B-1-f and Rule 2-B-1-m

d. Payments to third party trust. Payments by an employer into third party trusts for the Davis Bacon Act or a similar prevailing wage law provided the pension trust is qualified under IRC Sections 401(a) and 501(a).

e. The value of special rewards for individual invention or discovery

f. Dismissal or severance payments, except for time worked or accrued vacation. However, if the employer has a policy where paid time off accrues during an employee's employment and that paid time off is paid in a lump sum following the termination of employment, that payment of accrued time would be included.

g. Payments for active military duty. For example, if an employee who is a member of the National Guard is paid for two weeks of service.

h. Employee discounts on goods purchased from employer

i. Expense reimbursements to employees to the extend an employer's records substantiate the expense was a valid business expense

j. Reimbursed expenses and flat expense allowances, except for hand or hand-held power tools, may be excluded from the audit if all three of the following conditions are met: (1) the expenses were incurred upon the business of the employer, and (2) the amount of each employee's expense payments is shown separately in the record of the employer, and (3) the amount of each expense reimbursement is a fair estimate of the actual expenses incurred by the employee in the conduct of his/her work. Note: when it can be verified that the employee was away from home overnight on the business of the employer, but the employer did not maintain verifiable receipts for incurred expenses, a reasonable expense allowance, limited to a maximum of $30 a day, is permitted.

k. Supper money for late work

l. Work uniform allowances

m. Sick pay to an employee by a third party such as an insured's group insurance carrier that is paying disability income benefits

n. Employer-provided perks such as: (1) use of a company-provided automobile, (2) an airplane flight, (3) an incentive vacation (e.g. contest winner), (4) a discount on property or services, (5) club memberships, (6) tickets to entertainment events

o. Employer contributions to employee benefit plans such as: employee savings plans, retirement plans and Cafeteria plans (IRC 125)

* States may have exceptions to this list. It's important to review with your Advisor.

How to plot year-end savings in Workers' Comp

As yearend approaches, many businesses turn their attention to tax planning, with the goal of minimizing federal and state taxes, but few invest a similar effort in workers' comp even though significant dollars are at risk. Here are six ways to control costs:

  1. Know and document what can be excluded from remuneration

    Not everything that is paid to employees is included in the workers' compensation calculation and excluded remuneration can be significant. It behooves employers to understand and carefully document all exclusions. Auditors work for insurance companies and are trained to catch mistakes that result in higher premiums; they are not as vigilant in identifying mistakes that will lower premiums.

    The sidebar has a list of common items included and excluded from remuneration. States have exceptions to the rules, so it is important to review the list with your WorkComp Advisor.

    Records that clearly document all exclusions will lead to lower premiums. For example, in most states (Pennsylvania and Delaware are exceptions) records should clearly document how much pay was overtime for the year. If the rate of overtime varies, such as 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. Review the list of excluded remuneration possibilities and capitalize on them by having the necessary data to support exceptions.

  2. When making yearend bonuses consider how they impact Workers' Comp premiums

    While the specific rules vary among states, in general, yearend bonuses and cash or cash equivalents, such as gift cards are included in remuneration. Some state exceptions are Tennessee that includes bonuses only when paid in lieu of wages and specified as a part of a wage contract, Oregon that excludes bonus pay that is not anticipated under the contract of employment and is paid at the sole discretion of the employer, New Mexico that excludes bonuses paid under a state approved safety program, and Texas that excludes safety awards paid in accordance with a written safety plan. On the other hand, certain gifts or perks for employees are not included in remuneration. These include employer-provided tickets to entertainment events, an airline flight, employer-provided automobiles, and club memberships.

  3. Add job classifications and job titles to payroll records

    There are nearly 700 job classifications in NCCI states and the definition and scope can change, so it is easy to understand that mistakes are made. In general, a business is assigned a governing classification that reflects the exposure of the overall operation. This is the classification that contains the most payroll and the first critical step is to be sure that it's accurate.

    It's important to note that auditors cannot add a higher rated code at the time of the audit, unless there has been a change in business operations, misrepresentation or fraud. Agriculture, construction, and staffing are exceptions to this rule. If there had been a significant change in the business operations, it's best to review the classifications with your advisor, prior to an audit.

    Some workplace functions are common to all businesses; therefore, there are standard exclusions for clerical, drafting, clerical telecommuting, sales and driver classifications. Since this is usually the least expensive classification, employers should take steps to insure that all employees who qualify for this classification are properly identified. Adding job classifications and job titles can help reduce the possibility of error.

  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, agriculture and staffing, 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. Misclassification of workers' compensation codes in the construction industry costs employers thousands of dollars each and every year.

  5. Identify sole proprietors, partners, LLC members and executive officers

    Sole proprietors, partners, LLC members and executive officers are treated differently than regular employees. In some states, sole proprietors and partners who choose to be subject to the workers' compensation law and covered by the policy are generally assigned a payroll regardless of their actual gross income. This amount is adjusted annually to account for inflation and other cost of living factors. Each state allowing these individuals to "opt in" assigns its own payroll limit.

    Unlike the payroll of sole proprietors and partners, executive officers' payroll is generally limited by state specific minimums and maximums. It is important to make sure that executive officers payroll is accounted for correctly and that payroll is attributed to the correct class code.

  6. Be sure certificates of insurance are in order

    Certificates of insurance are a chronic problem and are often the source of unnecessary costs. 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 contractor has worked for the employer, 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.

The items listed above are a good beginning, but may only scratch the surface, depending on the complexity of the business. There may be issues of multiple state coverage, unusual exclusions, significant business changes and so on. A year-end policy review is always prudent to ensure that you are paying the lowest possible cost.