Workers’ Comp Basics

Premium Audit

Premium auditors ensure that you are paying the correct premium. While there are no shortcuts to less expensive workers’ compensation insurance premiums, auditors can help keep you from paying too much or getting a surprise bill at year-end if you’re unknowingly not paying enough.

What is a premium audit?
A premium audit is a verification of your company’s payroll for the period during which your insurance carrier provided workers’ compensation coverage. The amount of the payroll must be verified because your final workers’ compensation insurance premium is based on the entire remuneration paid to your employees. This includes money and certain benefits they receive because of their employment.

You can rest assured that the payroll information you provide will be used only to determine your premium. All audit reports will be kept confidential.

Why are audits performed?
Your policy contract and some state workers’ compensation laws require audits. The audit allows both you and your insurance carrier to be certain that your workers’ compensation coverage has been properly and fairly billed.

When are audits performed?
Yearly audits are performed at the end of each policy period. Cancellation audits are performed as soon as possible after workers’ compensation coverage is terminated.

Who will perform the audit?
There are two types of audits: mail and physical. If your account qualifies for a mail audit, we will request your records via U.S. Mail. Otherwise, an auditor will schedule a time to meet with you in person.

How are appointments for physical audits made?
The auditor will either telephone you or mail you a written notice.

Where will the physical audits take place?
If we have audited your records before, the audit will be completed at the same location as prior audits, unless we are notified otherwise. If we haven’t yet completed an audit or if you would like us to contact your accountant’s office, please be sure to let the auditor know well in advance so the audit can be scheduled for a time and place that is convenient to you. Also, please let the auditor know right away if your payroll records are kept out of state. If you receive a mail audit notice, please comply by promptly sending the requested records to us.

What if I have more than one location?
Please note that records for all additional locations should be kept at the main location for audit. Our auditor will not go to each location for an audit.

What records are required for my audit?
Here are some of the documents your auditor will need for the policy period being audited. Additional records, including bank statements, may also be needed for your auditor to accurately determine your payroll.

  • State unemployment quarterly payroll tax reports, including 941s.
  • Cash disbursements journal
  • General ledger (posted to date)
  • Certificates of insurance (if subcontractors were used)

Also, be sure to provide the following information for the audit period:

  • Overtime– If you paid overtime to your employees, your records must show the overtime pay separately by employee. Be sure to also summarize the overtime pay by classification code.
  • Split of Classification—If an employee’s classification code can be split, you must have the employee’s time separated by the hour. It cannot be separated by percentage of time worked.
  • Subcontractors and contract labor— If you use subcontractors or contract labor, please have all certificates of insurance and payroll records available for the audit. If you are unable to provide evidence of insurance, you must pay the workers’ compensation premium for that uninsured labor. Also remember that paying workers by 1099 does not necessarily make them an independent contractor, and you may be subject to paying premiums on them. If you aren’t sure of your state’s statutes regarding coverage of subcontractors, please give us a call.

Who should represent my company at the physical audit?
Our auditor must have the assistance of a person familiar with the records and duties of each employee.

Are there penalties for not cooperating with the audit?
Yes. The insurer may cancel your policy for failure to provide audit records or for failure to cooperate with the auditor, in addition to imposing penalties and fines that may include:

  • A fine of $500 may be assessed if you fail to maintain essential records.
  • A fine of $500 may be assessed if you fail to allow access to the essential records.
  • If the auditor is unable to complete an audit, your insurer may arbitrarily determine payroll and charge up to a maximum of three times* the most recent estimated amount of premium.

*Specific to individual states