Workers' compensation audits are a critical part of ensuring that employers are paying the correct amount for their workers' compensation insurance coverage. These audits are conducted by insurance providers to verify that premiums are calculated based on accurate payroll and other relevant records. This comprehensive guide provides a detailed, step-by-step overview of how a workers' compensation audit is conducted, using an example to illustrate the process.

Step 1: Preparation

The first step in preparing for a workers' compensation audit is to ensure that all necessary records are up to date and easily accessible. These records include:

• Payroll Records: Detailed records of each employee's compensation, including any changes in compensation over the last year. This is crucial for accurately assessing the risk profile of the workforce 3.

• Employee Records: These should include each employee's job description and class code, as insurers use these classification codes to determine each employee's level of risk based on their job duties. Additionally, documenting any changes to job descriptions and other business functions as they happen is essential 3.

• Cash Expenses: The auditor will review your company's cash flow, expenses, cash disbursements, and general ledger. Ensuring that all relevant expenses are accounted for is crucial for maintaining accurate records 3.

• Tax Reports: Include employee W-2s and 1099s for all employees and independent contractors, as well as Form 941, Form 944, and other federal tax return forms for your company. These documents are essential for verifying the accuracy of the payroll information and ensuring that all employees are correctly reported to the IRS 3.

• Certificates of Insurance: For any subcontractors who have worked for you over the last year. If the subcontractors do not have workers' comp, they'll be included as part of your payroll. This is not only necessary for verifying that these individuals are covered but also for ensuring that the employer is accurately reporting the total workforce to the insurance provider 3.

Step 2: Audit Request

Once the insurance provider has gathered all necessary information, they will request an audit. This request may come in various forms, including a formal letter or a phone call. It's essential for businesses to respond promptly to audit requests to facilitate the audit process. Prompt response is crucial as delays can lead to increased scrutiny and potential penalties. Engaging with the insurance provider early on can help identify and resolve any issues before they become significant problems 3.

Step 3: Audit Process

The audit process begins with the insurance provider reviewing the records provided by the employer. They will compare the information in these records to the data they have on file. The most significant considerations carriers use in determining workers' compensation premiums include:

• Payroll: The amount of payroll generated by the employer, including wages, salaries, and non-cash compensation. Payroll figures are critical for determining the employer's risk profile 5.

• Classification Codes: The classification(s) assigned to the employees based on business operations, matching different workplace exposures with corresponding classification codes. Classification codes help insurers assess the risk associated with specific job positions 5.

• Past Loss Experience: The past loss experience of the employer, including the experience modification factor, which is a calculation that applies to policies with more than $5,000 in premium. This factor is significant in determining premiums, especially for policies with high premiums 5.

Step 4: Identifying Discrepancies

During the audit, the insurance provider will identify any discrepancies between the information provided by the employer and the data on file. Common discrepancies include underreporting payroll to reduce a workers' comp premium, supplying inaccurate job descriptions to represent lower risk for reduced workers' compensation premiums, providing false financial documents, and not reporting subcontractors to lower the workers' compensation premium. Identifying these issues early on is crucial for resolving them before they impact the audit outcome 4.

Step 5: Resolving Discrepancies

Once discrepancies are identified, the employer and the insurance provider will work together to resolve them. This may involve adjusting payroll records, correcting classification codes, or providing additional documentation to support the employer's claims. A collaborative approach is essential for ensuring that all issues are addressed effectively and that the premiums are calculated accurately 4.

Step 6: Finalization

After all discrepancies have been resolved, the audit is considered complete. The employer will receive a final report detailing any adjustments made to the premiums and the reasons for these adjustments. It's crucial for employers to review this report carefully and make any necessary changes to their records to avoid future issues 3.

Additional Considerations

• Payroll Billing Programs: Enrolling in a Payroll Billing program can help reduce the uncertainty surrounding Workers' Comp premiums by coordinating payroll reporting with the insurance carrier. While audits are still required, enrollment in such a program can make the process smoother and more efficient 2.

• Compliance and Timeliness: Ensuring that all payments to injured workers are made promptly and correctly is crucial. Delays in payments can lead to penalties and damage the employer's reputation. Compliance with timely payment standards is a key aspect of maintaining a good relationship with the insurance provider and the workers' compensation administration 6.

In conclusion, a thorough understanding of the workers' compensation audit process, coupled with a proactive approach to preparation and communication, can help employers navigate the audit process effectively. By ensuring that all necessary records are up to date, responding promptly to audit requests, and working collaboratively with the insurance provider to resolve any discrepancies, employers can ensure that their workers' compensation premiums are accurate and up to date.