What Is a Workers’ Comp Audit?

Annually, most businesses are subject to a workers’ compensation audit. During this audit, your insurance provider will analyze details relevant to your policy and make any necessary changes or recommendations.

What exactly is a workers’ comp audit? What can you expect from it? And how can you adequately prepare for it?

The Basics of Workers’ Comp

In case you aren’t familiar, workers’ compensation insurance is a type of insurance policy held by business owners to protect their employees (and often, their contractors and subcontractors) in the event of an injury in the workplace. Workers’ comp benefits payout regardless of how or why the injury occurred, and owners are responsible for paying a recurring premium to maintain this coverage.

In most states throughout the U.S., workers’ comp insurance is a legal requirement for most types of businesses. Even if it wasn’t a requirement, you’d probably want this coverage to protect your employees and shield you from potential liability issues.

The Workers’ Comp Audit

So what is a workers’ comp audit?

Like with other types of insurance policies, your coverage and premiums will vary depending on your needs. You don’t want to have to pay extra for coverage you don’t really need, and your insurance company doesn’t want you to underpay for an inflated level of coverage. In order to make sure you’re getting exactly the coverage you need and paying a fair premium for that coverage, most insurance companies conduct an annual audit to verify details of your business.

In most areas throughout the country, workers’ comp audits are a legal requirement. Even when not legally required, they’re commonly executed by insurance companies to verify details and ensure adequate coverage and appropriate pricing.

Two of the most important things that the audit will examine are:

· NPayroll. Your insurance company needs to know how many people you’re employing, how much money they’re making, what benefits they’re receiving, and how much overtime they’re working. With this information, they’ll be able to sculpt a much more accurate policy.

· Job classifications. Job classifications help insurance companies understand and evaluate risks associated with each job. The better they understand who works in your organization and what risks they face, the more appropriate coverage and premium prices you’ll receive.

Depending on who’s conducting the audit and what the circumstances are, you may be able to complete the audit and provide all information remotely. If this isn’t a possibility, you’ll be subject to a field audit, where an auditor will visit your location directly and verify key details.

Notifications and Prep Time

You’ll usually get plenty of advanced notice before undergoing a workers’ comp audit. And, since these audits typically happen on an annual basis, you should be able to anticipate when the next one is coming. Generally, you’ll have a few weeks to make preparations for the forthcoming audit.

Penalties for Misreporting

It’s important to be as honest and accurate as possible during your audit. Any of the following mistakes could result in a financial penalty or the cancellation of your coverage.

· Underreporting payroll. Don’t attempt to underreport payroll for the purpose of reducing your premium.

· Reporting inaccurate job descriptions. Your job descriptions and classifications need to be as accurate as possible.

· Providing false documents. Any attempt to forge or present false documents is a crime.

· Failing to report subcontractors. Contractors and subcontractors must be reported as part of your workers’ comp audit.

How to Prepare for a Workers’ Comp Audit?

In anticipation of a workers’ comp audit, these are the best ways to prepare:

· Organize your documents. Spend some time getting all your financial documents in order. This way, you’ll be able to provide them expediently and without disrupting your usual responsibilities.

· Collect and internally audit your data. It’s also a good idea to collect and internally audit all your data. Simple steps like making sure your payroll figures are accurate can ensure the accuracy of your audit.

· Document any major changes. Make sure that if there have been any major changes in your workplace, such as hiring new people, changing benefits plans, or changing job classifications and descriptions, that they have been appropriately documented.

The most important financial documents to prepare are your:

· Accounting ledger.

· Tax forms (including W-2s, 1099s, Form 941, Form 944, and federal tax returns.

· Certificates of insurance.

· Detailed job descriptions.

· Detailed business function descriptions.

During the audit, you can expedite results and minimize the possibility of a penalty with the following tips:

· Comply with all requests in a timely manner. Your auditor will likely have a number of requests, so try to comply with these requests in a timely manner. The faster and more efficient you are, the sooner the audit will be over with.

· Answer questions honestly. If your auditor has any questions, make sure you answer honestly.

· Ask for clarification if you don’t understand something. There are certain aspects of the auditing process that can be confusing or overwhelming, so make sure to ask questions if there’s something you don’t understand.

Nobody likes being audited for any reason, and most employers don’t like dealing with workers comp, even if it is a legal necessity that provides employees with critical protections. However, these types of audits are much easier to deal with once you understand them and are properly prepared for them.