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What Is Pay-As-You-Go Workers' Compensation?

 

Most employers must carry workers' compensation insurance. Employers can typically purchase the insurance policy through either the state or a private insurance company.

Under a traditional policy, premiums are based on your estimated payroll for the upcoming policy year. This anticipated premium can be paid as a lump sum amount or in installments. When the policy year ends, the insurance carrier compares your actual payrolls with the original estimate. This comparison could result in you owing the insurance company or the insurance company owing you. Both of those outcomes can be avoided by estimating correctly.

But payroll isn't always predictable. For example, if you hire or terminate employees unexpectedly, the estimate will not reflect that change, and an adjustment will need to be made at the end of the policy year.

Pay-as-you-go workers' compensation is designed to eliminate those types of adjustments.

A simple, accurate alternative

With pay-as-you-go, premium payments are made at the end of each payroll cycle. Because your premiums are based on the actual payroll cycle, there's no need for adjustments at the end of the policy year. There are no estimates and no cash flow surprises. You simply pay what you owe for each payroll cycle.

No lump sum payments

With a traditional policy, you must either come up with the entire premium cost upfront or put down a hefty deposit and then make monthly installments. This can put a squeeze on your budget.

Pay-as-you-go, on the other hand, requires little money down and allows you to spread out your payments over the course of the policy year.

Faster audits

All workers' compensation policies are auditable, no matter the billing type. These audits are performed by the insurance carrier at the end of the year.

During the audit for a traditional policy, the insurance carrier determines the actual premium for the policy period versus the estimated amount. This is often a tedious process that requires you to spend time tracking down payroll data for the entire year and responding to various requests from the insurance company.

The audit for a pay-as-you-go policy requires little to no involvement from the employer. Since the policy is based on real-time payroll wages, the insurance carrier already has the information it needs.

Available in most states

Pay-as-you-go workers' compensation is available in all states except Ohio, Wyoming, North Dakota and Washington. In those four states, employers must purchase workers' compensation insurance directly from the state. (They cannot buy it from a private insurance company.)

Although pay-as-you-go workers' compensation is increasing in popularity, it's still a fairly new trend. Let us know if you're interested, and we'll see how this could work in your situation.

 

 
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Payroll Partners
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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