What is a premium audit and why is it necessary?

The primary purpose of the audits is to obtain and verify the information to complete the actual earned premium for the policy period. In addition, audits are required to meet regulatory requirements and to collect rate making data.

The Premium Audit Process

A premium audit may involve inspection of accounting records including payroll journals, disbursements journals, general ledgers, Social Security reports, state unemployment forms or other tax reports. It is advantageous to have a designated individual available to assist the auditor. Ideally, this would be someone who is familiar with the work done by all departments and employees and also familiar with the records needed to complete the audit.

The type of premium audit used is based on the size of your policy and/or the nature of your operations and may be one of the following:

• Physical Audit — Generally conducted on-site or at an appropriate secondary location (e.g., an accountant’s office).

• Phone Audit —A representative of the insurance company contacts you over the phone to complete the audit. This type of audit is generally for small- to mid-sized accounts.

• Mail Audit —A voluntary audit form with instructions is mailed to you; the completed form is to be returned as instructed. Mail audits are generally conducted for smaller accounts.

What are some records that the auditor may request?

1. TAX REPORTS (Federal 940, 941, State Unemployment, 1040 Schedule C, W-2, W-3 or 1099 - Used for verification, balancing figures for payroll records.

2. PAYROLL RECORDS (Individual, summary, etc) - Used to obtain the detail payroll figures by employee, department, classification, etc.

3. CASH DISBURSEMENT JOURNAL -Used to obtain subcontracts and contract labor or sales / receipts if applicable.

4. CHECK REGISTER (check stubs, print out) - Used to report detail for subcontract labor (names of subcontractors and amounts paid)

5. GENERAL LEDGER (Chart of Accounts, Summary of Journals) - Used to report detail of wages, contract labor or sales if applicable)

6. Certificates of Insurance (from Subcontractors) - Proof that the subcontractors had workers compensation insurance in force covering the work performed for the contract period.

What are some common inclusions in the premium base of payroll?

1. Wages or salaries including retroactive wages or salaries.

2. Total cash received including commissions, draw, bonuses and stock plans.

3. Extra pay for overtime, holidays, vacations and periods of sickness.

4. Payments to employees on any basis other than time worked, such as piecework or incentives.

5. Payments for salary reduction, retirement or cafeteria plans (125) that are made through deductions from the employee's gross pay.

6. Expense reimbursement to employees to the extent that an employer's records do not substantiate that the expense was incurred as a valid business expense.

What are some common exclusions in the premium base of payroll?

1.Tips and other gratuities received by employees.

2, Dismissal or severance payments except for time worked or accrued vacation.

3. Payments for active military duty.

4. Expense reimbursements to employees to the extent that an employer's records substantiate that the expense was incurred as a valid business expense.

5. Sick pay to third party such as a group insurance carrier paying disability income.

6. Work uniform allowance.

What is overtime and how is the credit determined?

1. Overtime means those hours worked for which there is an increase of pay for work (a) in excess of the number of hours normally worked, (b) in excess of 8 hours in any day or 40 hours in any week or (c) for work on Saturdays, Sundays, or holidays. This does not define incentive pay commonly referred to as 'shift differential or 'premium pay associated with working other than normal day shift hours. The extra pay shall be excluded from the payroll provided the insured's records are maintained to show overtime pay separately by employee and in summary by classification.

2. The extra pay shall be excluded from the payroll provided the insured's records are maintained to show overtime pay separately by employee and in summary by classification.

How does the Interchange of Labor Rule affect my record requirements?

1. Employees who perform duties relating to more than one classification may be divided between two or more classifications provided that the following records are maintained.

2. The employer is to maintain proper payroll records by classification for each individual employee. An estimated or percentage allocation of payroll is not permitted. Such records must reflect the actual time spent working within each job classification and an average hour wage comparable to the wage rates in the employer's industry. If original payroll records do not disclose the actual payroll applicable to each classification, the entire payroll of the individual employee shall be assigned to the classification representing any part of his or her work that carries the highest rate. An exception to this rule is that CLERICAL employees and OUTSIDE SALES are not available for division of payroll.

If I have subcontractors what is my responsibility?

1. Manual rules C3, states " The contractor shall furnish satisfactory evidence that the subcontractor had workers compensation insurance in force covering the work performed for the contractor. For each subcontractor for which such evidence is not furnished, additional premium shall be charged on the policy that insured the contract as follows:

A. The contractor shall provide a complete payroll record OS the employees of each uninsured subcontractor. Premium on such payroll shall be used on the classification that would have applied if the employee of the subcontractor had been employees of the contractor.

B. If the contractor does not supply the payroll records of its subcontractor, the full subcontract price of the work performed during the policy period by the subcontractor shall be charged on the amount at payroll subject to the follow:

If investigation on a specific job discloses that a definite amount of the subcontract price represents payroll, such amount shall be the payroll for the additional premium computation. In contracts for:

(1) mobile equipment (graders, earth movers, bulldozers, drivers, vehicles under contract) the payroll shall not be less than 33 1/3% of the subcontract price. When the price does not include the cost of fuel, maintenance or other services provided, these shall be added to the contract price prior to the 33 1/3% amount.

(2) labor and material, the payroll shall not be less than 50% of the subcontract price.

(3) labor only, the payroll shall not be less than 90% of the subcontract price.

How do I know if payroll reports are required for my policy?

Payroll reporting is just one of the ways your policy could be set up. If you have questions regarding your policy, please contact your insurance agent, or Contact us

Why do I have to fill out a payroll report if I am paying monthly installments?

The premium on your policy was estimated based on the payroll figures supplied to our underwriting department upon policy issuance. The report you are completing is called a "check audit". We are using it to ensure that your actual payroll figures are in line with your estimated payroll figures.

Conclusion

The above information represents only some general rules and procedures common to most policy audit adjustments. This may not always represent specific rules or exceptions in force by your insurance provider. In these cases the auditor will answer any further questions. We hope this has been an assistance.