Premium Audit

Preparing for Your Premium Audit

As part of its policy contract, LWCC conducts periodic premium audits of its policyholders to identify changes in operations and to obtain all documentation needed to ensure all policyholders are being charged equitable and accurate premiums. LWCC’s objective is to make the audit process a positive experience for all parties. To that end, the following information will help you know what to expect from an audit and what expectations LWCC has of its policyholders.

When will I be audited?

LWCC audits every account it writes. Depending upon premium size and class of business, audits may be performed annually, every other year or every three years as needed. Audits may be conducted physically at your place of business or by mail, depending upon your premium size and business classification. Audits can involve up to three prior years of records that relate to your policy.

LWCC conducts four basic types of audits:

Pre-Audits – Pre-audits are conducted near policy inception to verify payroll information and to ensure business risks match those analyzed during the underwriting process.
Interim Audits – Interim audits may be performed periodically to address mid-term changes in business and/or operations.
Anniversary Audits – Anniversary audits are conducted at the end of your policy year to obtain actual payroll for your exposure, since this may vary from the estimate upon which your premium was based.
Cancellation Audits – These audits are conducted upon policy cancellation to obtain actual exposure.

Verifiable Records Needed for Your Audit

The better prepared you are, the quicker and easier your audit will be. Have two prior years’ worth of the following verifiable records available as well as someone who understands them to answer questions.

  • Federal tax returns*
  • IRS Form 941s or SUTAs*
  • Cancelled checks and bank statements*
  • General ledgers*
  • Cash disbursement journals*
  • Books of original entry (including source documents)
  • Job contracts and/or invoices
  • Certificates of insurance for contractors (if applicable)
  • Payroll records including overtime in dollars and hours, totaled by employee per pay period, and summarized by class code in order to receive credit for excess overtime pay (payroll paid in excess of the regular rate of pay)
  • Job descriptions detailing each employee’s duties
  • Supporting documentation (such as work orders or time sheets) that substantiates any split between state and federal payroll if you have longshore exposure
  • Written contracts
  • Executive officer payrolls and descriptions of their duties (even if the officers have elected to be excluded from state workers’ compensation coverage)**
  • Brochures or promotional items that offer a comprehensive description of your business operations, including your products and/or services

* You must provide at least two verifiable sources of support.
** Officers cannot be excluded under the Longshore and Harbor Workers’ Compensation Act.

Who will conduct the audit?

Audits are handled by one of LWCC’s staff auditors or an audit firm with whom LWCC contracts services. Accounts under $5,000 in annual premium are typically assigned to a vendor. It is likely that you will not see the same auditor each year.

When will I know the results of the audit?

Upon completion of your audit, you and your agent will receive a payroll audit statement outlining any premium changes that have occurred as a result of the audit. This is not a bill. You will be responsible for any additional premium charges once they are reflected on your invoice. Due to the confidential nature of the information obtained during your audit, written or verbal consent is required prior to the release of your audit information to your agent. If you have a simple question about the audit, such as in what class code payroll was placed, you should contact the auditor who performed the audit.

How can I avoid owing additional premium at an audit?

It’s much less disruptive to cash flow if premium is paid as costs are incurred rather than making up for any discrepancies after an audit. There are several things you can do during the year to minimize the chance of owing additional premium at audit:

If you pay premium via payroll reports, do so as accurately as possible and always complete and submit them by the due date. Maintain copies of these reports as well as any worksheets or information used in your calculations.

Give your agent detailed information about your business and the types of work employees perform so the proper class codes are chosen.

Notify your agent immediately anytime your operations change in size or nature.

What if I don’t agree with the audit’s findings?

In the event you do not agree with the findings on the audit statement, we encourage you to contact your agent for assistance in notifying LWCC. Notification disputing the audit must be in writing and should provide specifics (e.g. payroll amounts, class code issues, etc.) of what is being disputed. It is also important to remember that payment is expected on the undisputed portion of the audit.

Working together, an audit can be a positive experience.

A positive audit experience begins when the policy is first written. Think of it as a two-fold process. First, your agent partners with an LWCC underwriter to submit a complete and properly classified application. Second, the agent educates you, the policyholder, on how premium and the audit is payroll-based. Using this simple formula, everyone is knowledgeable about the policy, which will contribute to a straightforward, surprise-free audit.

Always remember, the policy states that the final premium is determined after the policy ends by using the actual premium (validated at the audit)—not the estimated premium—along with proper classifications and rates.

Please remember to keep your and/or your bookkeeper’s contact information current, and inform LWCC immediately if there are any changes to that information. If you have questions about the audit process, contact your agent, or have your agent contact the LWCC underwriter or business unit manager associated with your account at 800-227-4969.

Premium Audit FAQs

Below are commonly asked questions concerning workers’ compensation audits. The answers are short and give basic information. If you require additional information, please access the LWCC website at www.lwcc.com.

  1. Can an audit be performed with my CPA?
  2. How are payroll or remuneration given to a worker?
  3. How do I dispute an audit if I do not agree with the codes or payroll included on the audit?
  4. I have met with the LWCC auditor but have received notice that the audit was “unproductive” and also have received a notice of cancellation. Why is that?
  5. I usually complete an audit with an auditor who visits my office or my CPA’s office designated by the insured. However, for the current audit period, I received a mail audit form requesting payroll information and verification documents by mail. Why am I not completing a physical audit with the auditor for this audit period?
  6. If I have workers who perform different types of work during a work day or a work week, can their payroll be split into different class codes?
  7. Is overtime included in a worker’s payroll for audit purposes?
  8. Is the audit based on gross payroll or net payroll and what is the difference?
  9. What documents are needed to complete an audit?
  10. What is a certificate of insurance?
  11. What is an “executive supervisor”?
  12. What is payroll?
  13. What is the premium portion of overtime?
  14. What items are not included in gross payroll?
  15. What other items are included in gross payroll besides payroll and overtime?
  16. What records are needed for the audit?
  17. Who needs to be present at the audit?
  18. Whom should I contact if I have questions about my insurance, codes, audits, or claims?

1. Can an audit be performed with my CPA?

The audit may be performed with a CPA or at a CPA’s office. You (the insured) should be aware of the time and date of the audit so you can be available to the CPA if the auditor has questions that the CPA cannot answer or if the auditor needs documents the CPA does not keep at their site.

2. How are payroll or remuneration given to a worker?

Payroll or remuneration is usually given in the form of a check but may be paid in cash. LWCC does not encourage the use of cash for payroll or remuneration purposes. If you (the insured) pay your workers in cash, strict record-keeping requirements must be met.

3. How do I dispute an audit if I do not agree with the codes or payroll included on the audit?

To dispute an audit, you should submit a letter through your agent to the LWCC Audit Department via e-mail to audits@lwcc.com or via fax to 225-231-6542. In the letter, you should include the exact reason for the dispute including codes, payrolls or individual workers whose code or payroll with which you do not agree. Attached to the letter should be copies of payroll journals, invoices, etc. that support the position taken.

4. I have met with the LWCC auditor but have received notice that the audit was “unproductive” and also have received a notice of cancellation. Why is that?

If records are not available at the time of the audit, the auditor will request that you provide the necessary records in a reasonable period of time. If those records are not provided, and depending upon the relative importance of the records, the auditor may return the audit marked as unproductive, or the premium audit reviewer or underwriter at LWCC may decide to classify the audit as unproductive after review. The information concerning the audit’s unproductive status will be communicated to you by the auditor. If you do not provide the information after being informed that the audit was unproductive, a notice of cancellation may be sent. The types of missing information that could cause an audit to be unproductive include, but are not limited to, the following:

  • Missing verification documents. For example, 941 Federal Quarterly Reports; 1096/1099 forms for contract or subcontract labor; tax returns
  • Missing information about entities, officers, locations, or operations
  • Missing payroll or wage source information
  • Missing information for cash labor

5. I usually complete an audit with an auditor who visits my office or my CPA’s office designated by the insured. However, for the current audit period, I received a mail audit form requesting payroll information and verification documents by mail. Why am I not completing a physical audit with the auditor for this audit period?

LWCC, like most workers’ compensation insurers, utilizes mail audits for some of its policyholders that keep very detailed records, have little to no change year to year in premium, and have no claims filed on their policies. Mail audits allow the insurer to receive the information it needs, yet saves the policyholder the time it would have spent with a physical audit and meeting with the auditor. All verification records sent by mail audit are kept confidential. LWCC will be performing more audits utilizing the mail audit process.

6. If I have workers who perform different types of work during a workday or a work week, can their payroll be split into different class codes?

The general rule is payroll cannot be split. The exception is if you have workers who have an interchange of labor during a workday or work week, the payroll may be split between different codes, especially if you are a construction contractor. In order for the split to be given at audit, you must keep separate records of the activities of the workers. The separation of payroll should show the date, the hours worked in that activity and the amount paid to the worker for the different types of work performed.

Caution: Payroll cannot be split if one of the codes for work done is a standard exception code. Standard exception codes include Clerical Work (8810); Sales (8742); Clerical Telecommuting (8871); Automobile Sales (8748); and Drivers, Chauffeurs & Helpers (7380). In some situations, Drivers (7380) can be split with another code if proper records are kept.

7. Is overtime included in a worker’s payroll for audit purposes?

Yes, overtime is included in the gross payroll calculation at audit. A credit of the “premium portion” of the overtime is made by the auditor if you have maintained records in a manner that allows the auditor to easily identify overtime and make the proper deduction.

8. Is the audit based on gross payroll or net payroll and what is the difference?

The audit is based on gross payroll. Gross payroll is the entire payroll of the worker before taxes or other deductions are made. Net payroll is the amount of payroll that remains after taxes and deductions such as medical insurance, life insurance, any Cafeteria 125 plan deductions and 401K or qualified retirement plan deductions.

9. What documents are needed to complete an audit?

The documents needed for an audit can be verified when you (the insured) or the auditor call to confirm the audit appointment. You should ask specifically what documents are needed and discuss which documents you will have available at the appointment with the auditor. The records required for the audit will depend on the type of business being audited.

For example: The documents needed to audit a doctor’s office that utilizes only W-2 payroll will be different from the documents needed to audit a construction general contractor who utilizes W-2 employees, contract labor and subcontractor labor.

For the doctor’s office, the documents required at a minimum are: a payroll journal, Federal Quarterly Reports (941s), State Unemployment Reports (SUTAs), a general ledger or bank statements and cancelled checks, and the most recent tax return filed for the business.

For the construction contractor, the documents required at a minimum are: a payroll journal, Federal Quarterly Reports, SUTAs, a general ledger or bank statements and cancelled checks, cash disbursements journal, Form 1096 with 1099s, certificates of workers’ compensation insurance for the subcontractors and the most recent tax return filed for the business.

10. What is a certificate of insurance?

A certificate of insurance (COI) is a document that shows that a business has workers’ compensation coverage. The COI will show the name of the business, the coverage dates, the policy number, the carrier providing workers’ compensation coverage, the insurance agent for the business and the name of the business receiving the certificate. COIs are commonly used for businesses that are subcontracting their services to another business.

For more information on certificates of insurance, please click here.

11. What is an “executive supervisor”?

An executive supervisor is a supervisory person in the construction industry. The class code 5606 is used to classify project managers, construction managers or construction superintendents on construction sites. There are specific requirements that must be met to use this code:

• Used for construction or erection risks only

• The executive supervisor must exercise control through superintendents or foremen of the employer and cannot have direct control over the workers at the construction or erection site

12. What is payroll?

The National Council on Compensation Insurance defines payroll as money or substitutes for money. Payroll may sometimes be referred to as “remuneration.”

13. What is the premium portion of overtime?

The premium portion of overtime is the amount of overtime paid that is in excess of the worker’s hourly rate of pay. The premium portion of overtime is broken out as a percentage of the amount paid for overtime depending on whether or not the overtime is paid at a rate of time-and-a-half per hour or double-time per hour.

For example: Joe is paid $10 per hour for a 40-hour week. This week Joe works 42 hours. Joe is paid overtime at time-and-a-half for the two additional hours. To determine how much of Joe’s payroll this week is included as gross payroll, multiply $10 by 40 hours to equal $400. Half of Joe's hourly pay rate is $5. For the two additional hours Joe worked, he would be paid two hours times $15 plus $400 to equal $430. At audit, the auditor will determine Joe’s gross pay for the week to be $430. However, the auditor will calculate Joe’s auditable payroll to be $420. The $30 overtime pay is divided by 3 to determine the premium portion of the overtime, and a deduction is made in the audit for $10.

14. What items are not included in gross payroll?

Tips or gratuities, severance pay, payments for active military duty, work uniform allowances, employer contributions to retirement plans or Cafeteria 125 plans are not included in gross payroll.

15. What other items are included in gross payroll besides payroll and overtime?

Payroll includes bonuses, holiday, vacation and sick pay, meals and lodging if those items are provided to the worker as part of his or her wages.

16. What records are needed for the audit?

The insured should receive a letter or phone call from the auditor assigned to perform the audit. The letter will include a list of documents needed for the audit. If the auditor makes contact by phone, the auditor should inform the insured of the documents needed and answer any questions the insured may have about the upcoming audit.

17. Who needs to be present at the audit?

LWCC prefers that the audit be performed with an owner or officer of the company. If an owner/officer is not available, then the audit should be conducted with an individual who is knowledgeable about the company’s operations, the employees and their job duties, whether the insured uses contract or subcontract labor and the accounting system that is used to record payroll or non-employee exposure.

18. Whom should I contact if I have questions about my insurance, codes, audits, or claims?

The person to contact is the agent who wrote the policy. The agent will know whom to contact at LWCC for the answers to your questions.