That first workers’ comp audit can be quite the surprise (and nightmare) for many of my business owners with employees. This is especially true for fast growing businesses that allow their payroll to grow quickly. Generally, Workers compensation is an estimated premium policy based on expected payroll in the next 12 months, and like most business estimates, they’re rarely exact.
Some workers’ comp insurance policies get around this potential issue by using a “pay as you go” method of determining what the premium will be. These work by either self-reporting each pay period, or using a payroll provider to report each pay period and amount of gross pay. We have these alternative options available for most of our clients. I anticipate pay as you go will increasingly become the standard because it offers a lower down payment and predictability for everyone.
The traditional method of estimating and adjusting during the year fails for many because of the lack of adjusting during the year. Business owners are busy and even if they don’t intend to not report changes, finding the time is not always easy, especially for the smaller business owner already working from morning until bedtime trying to keep it all together.
That doesn’t change the fact that when a large audit bill comes from the workers’ comp insurance company that many business owners will call and ask for an explanation. Which is why I thought it may be helpful to write an article about how audits are calculated and try to diminish the potential for a surprise. While not all encompassing, this should serve as a good general overview of the process.
It’s important to also note that worker’s compensation, just like other business insurance is state based, meaning each state sets its own rules and regulations, and your state method may have differences.
Ok, so to calculate the total amount owed, or amount you should be refunded, you should do the following calculations:
Review the gross payroll and multiply that by the workers’ comp rate for each class of workers to give a total for each class (and you may only have one class, ie landscaping for example as opposed to landscaping = $120,000 in payroll, and office/admin = $40,000 etc….).
Add the total workers comp for each class, and that gives you the total gross premium.
Adjust if a MOD (if you’re not sure what a MOD is, it doesn’t likely apply to your business) exists. Once you have the MOD (if applicable) adjusted gross premium, you subtract what was paid, THEN the net amount is what you owe, or if negative, the amount you have coming back.
Payroll x workers compensation class rate (for a given class) = gross premium owed (plus some fees – ie “expense constant” and other misc fees)
Gross premium owed x MOD rate (if there is one) = net premium owed
net premium owed – premium paid = amount due/refunded (refund if premium paid is more than net premium owed)
You can find your rate on your WC policy DEC page (or we can look it up for you too).
MOD RATE = (Experience Modification Factor), this can be called “Comp Mod,” “Experience Mod,” “X-Mod,” albeit generally, the most common way I hear it referred to is simply “MOD.” A MOD is for businesses that are not new and have a certain level of payroll (generally over three years old and at least $200,000 in payroll, however because it’s premium based, various types of businesses can have the same payroll and either have, or not have, a MOD rate). MOD rates change your workers compensation premium by using a multiplication method.
For example, a MOD rate of 1.0, as you can imagine, doesn’t change your premium because 1 times your premium is the same as your premium. The MOD rate will move up and down based on your loss history. Your loss history is the composition of number of claims and the amount of claims against your workers’ comp policy. Claims against your general liability and/or your commercial auto don’t count.
What is a surprise to many business owners is that the number of claims (called the frequency) matters and it matters a lot. In fact, it’s “better” to have one $10,000 claim than it is to have four $2,500 claims in a set period of time. The reason is straight forward, each claim is expensive to process, regardless of the amount paid out.
The upside with having a MOD adjustment is if your company has a lower loss history than others within the same class code in the state, you can expect to have a lower insurance rate. Obviously, the same is the opposite for employers that have employees getting hurt more often. The takeaway is keeping your employees away from harm is not only a responsible thing to do, it’s a competitive advantage strategy as well. If your net cost of labor is lower than your competition, it doesn’t take long to figure out you can increase your profits simply by taking safety seriously.
One last word about MOD rates. It’s an area that many insurance agents get flat out wrong and the clients pay for it. Either make sure your agent understands and can help you with your MOD calculations or move to another agent that can.