5 Tips to Survive a Workers' Compensation Premium Audit

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The term "audit" may sound like an intimidating process, but a premium audit can be fairly easy to navigate with a few tips and a little help.

What is a premium audit?

Workers' compensation premiums are typically based on estimates of your company's payroll and employee data (i.e., job classifications), or projected gross sales over the course of your policy term. When an insurer conducts a premium audit, they're trying to calculate your business's final premium. In other words, they're looking to see if the amount that you've been paying for your business insurance policy matches up with your company's true risk level.

In most states, workers' compensation and other types of business insurance policies require premium audits as a standard practice to assess risk levels and actual money paid. They can take place in-person or remotely via the mail or over the telephone.

Insurers are likely to contact your business as your policy term ends to schedule time to review any pertinent information. Typically, you'll be asked to submit documentation by a specific date and answer some general questions about your business and its employees.

Once your insurer has all the information that they need, they will determine whether your premium needs to be adjusted or if you owe money. If necessary, your insurer will recalculate your policy premium and refund or credit you for the cost difference between premium totals.

Tips to stay ahead of the game.

Just like with any business process, preparing for a premium audit can either be easy or extremely difficult. "Failing to prepare is one of the biggest challenges that small businesses face in today's economy," says Frank Fusco, vice president of sales and licensed agent at Automatic Data Processing Insurance Agency, Inc. (ADPIA), an affiliate of ADP®. "It's important to take certain steps ahead of time so you can stay organized and make your experience simple and easy."

Here are five tips as you prepare for a workers' compensation premium audit:

1. Keep your payroll and sales information up-to-date.

Your insurer or auditor will most likely want to review several financial records, including your federal tax return forms, W-2 and 1099 forms for all employees and contractors, and your company's general ledger or sales journal. By consistently updating and comparing your actual payroll and sales data (including overtime pay deductions) to the estimates in your policy, you can decrease the likelihood that you'll need to significantly adjust your premium at the end.

2. Classify your employees correctly.

Over the course of your policy, it can be expected that your employees' job roles or tasks might change (i.e., promotions). Since your workers' compensation premium is based in part on the type of work your employees do, maintaining accurate job classifications will help to correctly calculate your risk exposure.

3. Assign a designated contact person.

Designate a person with extensive knowledge of your business and its processes (i.e., recordkeeping) to work with your insurer or auditor. This will streamline communication between all parties and make the entire process run more efficiently.

4. Review your original policy and prepare any questions you may have.

It's important to understand how your initial premium was calculated. By analyzing the original policy, as well as your other business documents, you will be more equipped to ask the right questions and make the proper adjustments when the time comes.

5. Don't be afraid to ask for help.

No one likes to be frustrated, especially during an audit. To avoid confusion, reach out to your insurer early. For instance, most insurers can address your concerns by providing a specific checklist of documents that they need from you or even a list of frequently asked questions or a sample premium audit to refer to.

You don't have to do it alone.

If workers' compensation administration is a major concern for your business, Fusco recommends speaking to knowledgeable agents, like at ADP® affiliate, ADPIA. Not only can a licensed agent help you find the right coverage for your business, but many also offer solutions that allow you to pay workers' compensation premiums using real-time payroll data and carrier rates – saving time and improving cash flow.

"Premium audits shouldn't feel like the biggest burden in your business," concludes Fusco. "Maintaining accurate records and seeking the right professional help when you need it will provide you with peace of mind and free up additional time to grow your business."

To learn more about protecting your employees and your business, check out ADPIA for more information on Workers' Compensation Insurance.

Automatic Data Processing Insurance Agency, Inc. (ADPIA) is an affiliate of ADP, Inc. All insurance products will be offered and sold only through ADPIA, its licensed agents or its licensed insurance partners; One ADP Blvd. Roseland, NJ 07068. CA license #0D04044. Licensed in 50 states. Certain services may not be available in all states with all carriers. Some carriers may charge an additional fee for services. This information is not intended as tax or legal advice. If you have any questions, contact a tax or legal professional. ADP, the ADP logo and ADPIA are registered trademarks of ADP, Inc. Copyright © 2023 ADP, Inc. All rights reserved.