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The Basics of Workers’ Comp
Workers’ Compensation is a state-mandated insurance coverage that provides wage replacement and medical benefits to employees in the event of an injury or illness throughout employment.
Workers’ compensation is intended to cover the injured or sick employee’s medical bills and wages while away from work. The majority of the states require businesses to have workers comp while few make it optional for businesses with a certain number of employees.
Some states also offer workers’ comp through a state-managed fund while at the same time allowing private insurance companies to provide the service. In monopolistic states like North Dakota, Ohio, Washington, and Wyoming, businesses must purchase their workers’ comp directly from the state, and private companies are not allowed to provide workers’ comp.
Each state has its own workers’ compensation rules. To review the rules and requirements for your state, visit WorkersCompensation.com
Traditional Workers’ Compensation Insurance Programs
The standard workers’ compensation premium calculation considers the number of employees, the type of work done, and the individual risk for each employee. The majority of the states use the National Council’s Compensation Insurance recommendations, while some states use their criteria.
The job classification rate is multiplied by every $100 of the total annual employee payroll for all employees under a particular classification. The total for each classification is summed then totaled.
[Annual Employee Payroll / 100) x Workers’ Compensation Insurance Rate = Estimated Workers’ Compensation Cost]
Some states include a modification factor based on your claims history as part of the overall equation to determine premium costs. The premium amount is then based on an estimate since it is not clear what the payroll figures will be when taking up a policy.
The process is subject to errors such as the employer reporting an employee in the wrong job classification or calculating the total annual payroll or in both circumstances. The high probability of error is why insurance undertakes audits to ensure that they collected the correct premiums and charge the client for any inconsistencies.
Advantages of Pay as You Go Workers’ Comp Programs
With the pay-as-you-go option, the calculations that will work out the comp premiums are done when processing the payroll and not calculated off of projected annual payroll.
- Improve organizational cash flow by reducing the amount of deposits and fixed payments that are required for premiums
In traditional workers’ compensation programs, businesses may be required to pay a deposit and fixed payment amount based on the estimated payroll for the year. At the end of the year, the insurance provider will either refund excess amounts paid or ask for additional payment to cover any difference.
With pay-as-you-go workers’ compensation, you get to streamline cash flow by only paying for the real-time payroll wages and reporting instead of miscalculated estimates, which may result in end-of-year audits. Suppose you have periods where your staff increases or decreases; you will pay on each payroll cycle for every dollar of payroll that is run. In the end, you get flexible payment terms with the entire annual workers’ comp premiums spread over a year and payable in smaller amounts.
- Minimize audit queries
As the policyholder, your insurance company may undertake an annual review (audit) of your company’s work comp records in person or by asking for the relevant documents by mail.
The audit is used to establish if payroll and class codes given at the start of the program were accurate and reflect the actual payroll and the nature of work performed during the payroll period. Audits are also used to determine if subcontractors have proper coverage in place
Pay-as-you-go programs are based on every dollar of payroll that’s run. There will be no overpaying, underpaying, or additional issues arising during an audit.
How to Get Pay as You Go Workers Comp
Give us a call at 855-924-1597. MartinoWest will source and present options suitable to your business size, industry, and location. Pay-as-you-go is designed for small business owners. With this type of program, you will be confident that your employees and business are covered and you are able to run your business more effectively.