In Kentucky, any business with at least one employee is required by the state to maintain workers’ compensation insurance coverage. Workers’ compensation provides protections for both employees and employers when a worker is injured on the job.
Workers’ compensation insurance rates have been decreasing in recent years around the U.S. due to declining claims and fewer severe claims. In Kentucky, there’s been an overall decrease in the state’s loss costs for the last 13 years, resulting in a nearly 11% decrease in workers’ compensation costs for Kentucky employers for 2018.
The rates employers pay vary by state, but all follow this formula to estimate premiums for the policy term:
Workers Classification Code Rate (x) Experience Modification # (x) (Payroll/$100) = Your Premium
Even though workers’ compensation is a mandatory expense for employers, with diligence and guidance from a Peel & Holland Risk Advisor, you can ensure your business isn’t overpaying for it.
Workers’ Comp Audits Determine Actual Costs
One valuable way to discover if you’re paying the correct amount for your employees is through an audit. When you pay your premiums for workers’ comp, the formula above is used to estimate your costs for the year. The premiums are based on the classification codes of your employees (which denote what type of work they perform), the Experience Modification Number (which is based on your company’s insurance claims history and is calculated by the state agency), and your anticipated payroll for the year. If your company has a history of claims, your Experience Modification Number will be higher. If your company has reported few, if any claims, you can expect a lower number.
Often, your insurer will conduct an audit to verify the insurance policy accurately reflects the employers’ risks, which impacts the premium amount. The auditor will examine employee classification codes and your payroll and then adjust accordingly. You could end up receiving money back, or you may have to pay additional costs to your insurer.
What Do You Need for an Audit?
Some people may become nervous when they hear the word “audit,” believing it has a negative connotation. But this audit is beneficial for your company because you will ensure you paid the proper amount for coverage. No one wants to overpay for insurance, especially if you end up not using it.
To prepare for the audit, you’ll want to gather essential financial documents and records related to payroll during the policy period, including:
- Wages (including overtime), bonuses, and commissions
- Your Quarterly Federal Tax Return (Form 941) and/or W-2/W-3 wage and tax statements
- Certificates of insurance (if subcontractors were used)
Your payroll vendor or software provider should be able to run reports that will provide your insurer the necessary information to perform the audit.
After the Audit
Once the auditor completes the review, be sure someone in your company goes over the findings. Compare your original policy information to the information found in the audit. Do the classification codes match? How far off is your estimated payroll to the actual payroll? If there’s a significant discrepancy, determine what payroll information the auditor used to compute the actual payroll amount.
Also examine your employees’ classifications to ensure everyone has been correctly designated based on their job. For example, an administrative assistant for a construction company could incorrectly be designated as a high steel construction worker, which has a higher rate. Anyone with an incorrect code could cost you more money in premiums.
Unfortunately, there may be times when you are paying a higher premium due to your company’s Experience Modification Number. Are there programs or initiatives your company can implement to lower this number? Since the number is based on the amount of claims and severity of the claims your company files, make sure that you have safety protocols and programs in place and that employees are up-to-date with safety training. Employees who understand how to perform their job safely will lead to lower claims for your company, and eventually, lower workers’ compensation insurance premiums.
Don’t be intimidated by a workers’ compensation audit. The process can help uncover classification errors and save your company money on its premiums. We’ve worked with businesses like yours to find the right coverage for their employees, and we can do the same for you.
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To learn more about Workers’ Compensation for Contractors, download our Ebook, or contact a member of the Peel & Holland advisory team.
