Work Comp Premium

How Your Workers Compensation Premium Is Calculated

No matter the size of your company, one of the most basic costs of doing business is insuring your employees against injury on the job. This makes your workers compensation premium one of the most precious fixed costs any business owner can make.

How Workers’ Comp Premiums are calculated:

Workers compensation premium is calculated according to how employees are classified (with regards to the specific type of work they perform) and the rate assigned to each employee classification. The premium rate itself is expressed as dollars and cents per $100 dollars of payroll for each class code. In most states, the NCCI determines the classification rate and experience modification factor (MOD).

Factors that Go into Setting Workers Compensation Premium:

Size of the employer’s payroll
Employee job classifications
Company’s claims experience

Premiums for work comp insurance are calculated by the formula below…

Payroll (per $100) X Classification Rate X Experience Modifier = Premium

How Your Payroll Affects Your Workers’ Comp Rate

The basis for an employer’s workers’ compensation premium is your payroll. For each $100 dollars of your payroll, there is a specific rate, which is determined by the classification codes of your employees. If you can keep detailed records for what employees are doing on multiple jobs or in different aspects of their job, you may be able to break out that portion of payroll and potentially save on premium.

Another huge thing to keep in mind is sub-contracted labor and 1099 employees. Many business owners make the mistake or think that if they have employees in this manner it does not affect their premium. If you are paying an employee as a 1099 instead of a W2 and they do not have their own work comp coverage then you are responsible for paying premium on those payroll dollars. There is not a week that goes by that I do not field this question or see this situation and I always have to educate business owners on it. The same thing applies to sub contracted labor. If you are not collecting certificates of insurance and verifying, they actually have coverage then you are responsible for the premium as well. Our goal is to help you understand everything possible that could end up costing you money at audit time. We do not want you to have a huge audit balance just as much as you do, so we do our best to let you know everything on the front side of getting a policy in place.

How Your Employer Classification Affects Your Insurance Rate

Businesses are separated into groups according to the type of work they do. The classification system identifies which type of work presents more risk to the employees performing these tasks.

How Your Experience Modification Factor Affects Your Premium

Your experience modifier – typically referred to as your Ex Mod – is a numeric representation of your company’s claim experience. Ex Mods are based on how your business compares to others in your industry with similarly classified employees. An average Ex Mod starts at 1.00. Employers with fewer and less severe accidents than average have a MOD of less than 1.00. This will generally take a few years of consecutive coverage to be effected one way or the other.

4 Advantages to Pay as You Go Workers’ Compensation.

Small business owners have a lot to think about. Whether it be finding new clients, efficiently servicing the clients you do have, making sure your employees are paid on time, what type of insurance to offer your employees, to what type and how much insurance coverage is needed to adequately protect the business; a business owner must be involved in all of these decisions. One of the largest fixed costs most small business face is workers’ compensation insurance coverage. In 48 out of 50 states this is required by law for nearly all businesses to carry this coverage. For this reason, any way to limit the cost of this coverage is helpful to a small business. Especially a start-up, a small business with a seasonal business cycle or a small business with cash flow issues. Pay as You Go Workers Comp Insurance Coverage is one option to help these types of businesses.

Pay as You Go Workers Compensation is a great way for seasonal and cash strapped small businesses to free up cash.

Improves Cash Flow

Most Workers Compensation Policies require a portion of the policy up front to establish coverage. After this initial payment the company pays 9 monthly payments beginning 3 months in to the cycle. The amount that is due up front is typically 25 or 30% of the entire premium. With the Pay as You Go Option most businesses, depending on revenue, can get policies in place for only a few hundred dollars. This allows the business to free up cash for more immediate business needs.

Increases Payment Accuracy

Pay as You Go Billing allows businesses to accurately pay what they owe each month based on real time payroll amounts. In a traditional work comp policy the payroll amounts are an estimate and during an audit at the end of the period they either are offered a refund for overpaying or they are charged for the additional amount of premium owed. Pay as You Go lessens this burden by allowing companies to pay a more accurate amount each month in real time.

Simplifies the Auditing Process

Because the amount of premium is paid in real time based on the payroll each month there are less inaccuracies during the auditing process. Typically the biggest problem during the auditing process stems from the business being improperly classified. This can cause a dramatic over or under payment if the business is supposed to be in a classification code that is dramatically more or less dangerous. A good example of this is related to driving risks. If a company has employees drive to many different locations to do a job as opposed to do a similar job at only one location without the employees operating a vehicle those are two class codes that are dramatically different risks and premium is dramatically different for those two businesses.

Allows the Business to Budget more effectively

When a business has a more accurate assumption of what their premium will be from month to month and throughout the entire year they can more accurately budget for other expenditures. This is important for new or growing businesses. If you are adding on to your location, thinking of buying new equipment or adding new employees than what you pay in premium will determine what and how much you can spend on these other parts of your business. Businesses that use a traditional workers comp policy may have to be more conservative in their growth because they need to keep more cash on hand for the auditing process.

How to properly prepare for a Pay as You Go Workers Compensation Audit

Pay as you Go Workers Compensation Audit

Get the best information about a Pay as You Go Workers Compensation Audit at MyInsuranceQuestion.com

Workers Compensation Insurance policies require an annual payroll audit to be completed. The purpose of the audit is to verify payrolls for the policy period, confirm operations (class codes) and to check for 1099 sub-contract labor. 1099 sub-contract labor can be added to your audit if they are uninsured. In order to exclude a 1099 from your workers compensation audit, they must meet the standards for an independent contractor and must provide a valid workers compensation certificate or state approved exemption. The workers compensation auditor will typically contact you by mail or phone to set-up a time to gather the necessary payroll related documents. There is typically a small period of time to complete the audit otherwise it’s submitted as non-productive. When the audit is non-productive the insurance company produces an “estimated audit” that increases payrolls over the original estimate and a notice of cancellation. The business owner then has to “reopen” the audit and complete within the time frame determined by the cancellation date. If the audit remains non-productive and the policy cancels, the insurance company then reports to the workers compensation bureau. Due to the unproductive audit the workers compensation bureau can prevent coverage from being purchased for that business until the audit is completed.

Typical payroll documents that are provided to the auditor includes the 941’s or Quarterly Tax Reports for the nearest 4 quarters of your policy period. Most policy periods do not work perfectly with the start of a new quarter, therefore, auditors collect the closest quarterly tax reports and commonly use a Payroll Summary for the exact time period to verify payrolls. Most auditors are not familiar with the Pay as you Go model, therefore they audit using the traditional method only, using the Quarterly Tax Reports. The use of the payroll summary for the exact time period is VERY IMPORTANT for the Pay as you Go billing option. Since the business owner is paying premiums based on actual payrolls it’s important to provide the payroll summary for the exact time period. It’s important for the business owner to communicate the need to use the payroll summary for the exact time period at time of audit. After the audit is completed the insurance company will generate a document that shows the payrolls used to complete the audit. If those payroll figures do not match to your payroll summary report either contact your agent for assistance to dispute OR the insurance company. Explain that your billing is Pay as you Go and the auditor’s results do not match your payroll summary.

In addition to payrolls, the auditor is confirming the employees classification is correct. For most businesses all employees belong in 1 of 3 classification codes. Each industry has a workers compensation code that is assigned. Some employees belong to a classification code that is not included in the main code OR their hazard is minimal, therefore classified separately. If an employee is performing job duties that belong in multiple workers compensation codes, typically those wages are either classified to the highest rated exposure or divided between multiple exposures. In order to separate payrolls, the business owner has to provide the auditor with verification of the hours worked in each code per employee. The two best methods for accomplishing this is a payroll system that documents the job description and the hours worked for each employee. Otherwise the business owner will need to use a Log Book to document the jobs and hours worked for each employee to properly separate. The clerical workers compensation code is one of the few codes that cannot be separated with another job duty. Clerical is 100% or nothing.