What Is A Workers’ Comp Audit?

A workers’ compensation audit is a review process conducted by an insurance company to verify the accuracy of the premium paid by a business for its workers’ compensation insurance policy. The audit ensures that the premium reflects the actual payroll and employee job classifications during the policy period. Here’s a detailed explanation:

 

Purpose of a Workers’ Comp Audit

 

1. Accuracy of Premiums: The primary purpose is to ensure that the premium paid matches the actual risk exposure of the business. Premiums are initially based on estimated payroll figures and job classifications, and the audit verifies these estimates against actual figures.
2. Compliance: The audit ensures compliance with state regulations and insurance requirements. Accurate reporting of payroll and job classifications is essential for maintaining compliance.

 

Audit Process

 

1. Notification: The insurance company notifies the business about the upcoming audit, typically towards the end of the policy period.
2. Data Collection: The business prepares and submits various records, such as:
   • Payroll records
   • Tax filings (e.g., IRS Form 941)
   • General ledger
   • Profit and loss statements
   • Employee job descriptions and classifications
3. Review: The auditor reviews these records to verify payroll amounts, employee classifications, and other relevant data. They may also look at the number of hours worked, types of work performed, and any subcontractor information.
4. Adjustment: Based on the audit findings:
   • If the actual payroll was higher than estimated, the business may owe additional premium.
   • If the payroll was lower, the business might receive a refund or credit.

 

Types of Audits

 

1. Physical Audit: An auditor visits the business premises to review records in person.
2. Mail Audit: The business mails the required documents to the insurance company for review.
3. Phone or Virtual Audit: The auditor conducts the review over the phone or via video conference, often requesting documents to be sent electronically.

 

Key Components Reviewed

 

1. Payroll: Total payroll amounts for the policy period.
2. Job Classifications: Accurate classification of employees based on their job duties.
3. Subcontractors: Information on subcontractors, including their certificates of insurance.

 

Benefits of the Audit

 

1. Fair Premiums: Ensures that businesses pay a fair premium based on actual exposure rather than estimates.
2. Risk Management: Helps identify areas for improving safety and reducing workplace injuries.
3. Cost Control: Potentially reduces costs by correcting misclassifications or identifying overestimated payrolls.

 

Preparing for the Audit

 

1. Organize Records: Ensure all payroll and financial records are accurate and up-to-date.
2. Review Classifications: Verify that all employees are correctly classified.
3. Consult Professionals: Seek help from accountants, payroll service providers, or insurance brokers if needed.

 

By understanding and preparing for a workers’ comp audit, businesses can ensure compliance, manage costs, and maintain accurate insurance coverage.