How Payroll Can Be Integrated with Workers Comp
Insurance providers are offering workers' compensation insurance on a pay-as-you-go basis. What are the compelling reasons for your business to consider the pay-as-you-go method?
- You don't have to make a large, cash-flow-killing down payment up front. You can purchase a policy with little money down and then pay your premium in smaller amounts spread over the course of the year.
- Your premium payments are based on your actual payroll, not projected annual payroll. That can help protect you from audit exposure — your premium is based on real-time payroll wages, not an estimate.
Aligning workers' comp premium payments to payroll cycles makes sense.
- No more anticipating payroll for the full upcoming year and paying that up front.
- You don't let the insurance company have the use of your money — if you overpaid — for the policy year.
- You don't run the risk of having to pay an additional premium that is due immediately if you miscalculated by lowballing the amount.
Instead, you can recapture cash flow because the premium is paid at the end of each payroll cycle, potentially eliminating any large adjustments at the end of the policy term. Companies are billing this as eliminating the audit surprise around tax time.
Spreading out the payments obviously lets you have more working capital throughout the year instead of under- or overpaying, which can negatively impact cash flow.
There are issues with this process and how it may impact your workers' compensation program, and state laws can affect what you can offer. For example:
- Pay-as-you-go is a premium payment concept only. Workers' comp insurance must still be provided through a state-approved workers' compensation insurance carrier or approved self-insured source. Payroll companies don't provide workers' comp coverage — insurance companies do.
- If your state requires a 30-day notice of cancellation be sent to the insured, then the workers' comp insurance company must collect at least enough premium up front from an employer to cover the insurance company's exposure for this 30-day period.
- The audit function is a policy condition of the workers' comp insurance contract and is not suspended in any way because you've chosen a different way to pay your premium.
The pay-as-you-go workers' comp is just a payment option. Workers' comp insurance is still workers' comp insurance. There's a lot more to workers' compensation insurance than just the method of premium payment. Remember that insurance companies follow rules established by each state, which means there will be a down payment that has to be made when a state requires a 30-day notice be given to the insured prior to cancellation, and that money has to be collected up front to cover the insurance company's exposure.
If the payroll reporting to the insurance company by the payroll service has been accurate and the premiums have all been paid by the payroll company to the insurance, then there should be no large additional premium or return premium at audit time.
For more on the pay-as-you-go option and how it integrates with our payroll service, give us a call.