by Frank Pennachio, WorkCompEdge Regular Contributor
Workers compensation policy premiums are usually based on estimated payrolls. The final earned premium is determined during a premium audit after the policy expires and is based on actual payroll. When payroll is higher than estimated, the employer owes additional premium, and when payroll is lower than estimated, money is returned. In current economic conditions, many employers’ payrolls are declining, so an employer may be paying higher than necessary monthly installments due to an overstated payroll estimate at the inception of the policy.
In these challenging times where cash flow is king, employers might want to consider another work comp insurance option known as Pay-As-You-Go.
Pay-As-You-Go integrates payroll processing with the payment of workers compensation premiums. The employer pays their work comp premiums each pay period based on actual payroll. Also, there are no upfront deposits or down payments.The advantages of Pay-As-You-Go plans include improved cash flow since your workers compensation premiums will be immediately reduced if your payroll declines during any given pay period. In addition, should you have an upward spike in payroll, you will not be surprised with a significant amount of premium due after the premium audit.
However, to participate in a Pay-As-You-Go program, an employer usually must outsource its payroll processing. If you have already outsourced payroll processing, you may want to explore whether Pay-As-You-Go is available through your current provider. If you have been considering outsourcing payroll, but have not yet done so, Pay-As-You-Go may be a tipping point in your decision.
Pay-As-You-Go plans are often touted as alleviating premium audit problems, but it is still critical for the employer to make sure a premium audit is done correctly. While it’s true that you won’t get a surprise with understated or overstated payroll estimates if you’re using a Pay-As-You-Go plan, that doesn’t absolve you from making sure you take all the right steps in providing and verifying information, such as the payroll classes to which your employees belong. The WorkCompEdge training module “Eliminate Overcharges by Taking Control of the Premium Audit” assists employers with avoiding errors and mistakes in their premium audit.
Pay-As-You-Go plans are available through several insurance companies and payroll processing services. If you’re interested in exploring this option, your insurance agent will be able to help you connect with providers of this type of program.
Improving cash flow and freeing up capital has likely never been more important for many businesses. Every little bit helps. Pay-As-You-Go plans may offer some relief.
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One of our readers sent this email, disagreeing a bit with Frank’s take on pay-as-you-go, and adding some other insight. What’s your opinion?
This article may be a little misleading. I work with insured’s who have had audit problems. In my opinion, most audit issues are created when the insured, the agent and the carrier don’t communicate about the real exposures. Generally speaking, I also find that if there are audit issues with the WC premium, there are also audit issues with the GL coverage.
Not all payroll services are the same and not all payroll services provide the same level of service that a committed independent agent can. I am working with a multi-state client right now who is with an international payroll service. The payroll service is not providing good service and failed to identify USL&H exposures; even though they issued COI’s for marine operations. In a worst case scenario, this oversight exposed the insured’s executive officers to fines and potential jail time. While some payroll providers agree to partner with independent agencies at some level, this particular service provider does not. So the only benefit of working with this provider is a the monthly premium payment.
When I started in this business, there used to be a monthly payroll reporting option. I think that this is a still available, though probably underused option Maybe the time is right to explore this old fashioned way of calculating WC premiums.
We appreciate comments to blog posts as they provide additional perspectives and an opportunity for greater clarity.
First, some clarity. My view of Pay-As-You-Go programs is that they must be utiilized wtih a qualified agent. They are just a way to pay premiums, but are not intended to be a tool to remove a qualified agent and place the clients in the hands of someone who is not best suited for them. Pay-As-You-Go Programs are frequently used by qualifed agents as a service to their clients.
I would disagree that most audit problems arise from miscommunication regarding exposures. This is probably not the forum to detail all of the areas where problems and overcharges occur, but WorkCompEdge addresses them in detail.
Monthly reporting is still available, but usually requires a large down payment which is held in a deposit account and does not apply to the premium due. In these tough times, removing working capital from the business is not something most employers want to do. Pay-As-You-Go Programs do not require deposits and employers only have to pay premiums on their actual payroll from their current pay period.
Thanks again for the comments … keep them coming!