The best time to prepare for a Workers’ Compensation audit is at the start of a new policy year.

Setting up all processes and recordkeeping properly and keeping them updated throughout the year can help ensure you’ll be ready for an audit and help protect your company from penalties for violations.

According to the New York Workers’ Compensation and Employers’ Liability Manual, if your organization’s premium is:

• $10,000 or over, it will be subject to a physical (a.k.a. on-site) audit once a year.
• Within the $5,000 to $10,000 range, an audit will be conducted the first year a carrier offers the policy and at least once every three years thereafter (a signed payroll statement must be provided any year a physical audit is not conducted).

If an audit is impracticable, a signed payroll statement may be accepted.

At the start of a policy year, you provide your carrier with estimated payroll and the type of work your employees do. In turn, they assess the risk involved to calculate your annual premium. Since the number of employees you have, the work they do, how much you pay, and other factors can change during the year, an audit is conducted at the end of the policy year. As a result, you may get a refund; you may be charged more; or you may come out even.

Typically, your policy will contain a provision stating you agree to be audited. So, you are legally obligated to comply in a timely manner. For a physical audit, you’ll generally receive notice within 60 days of the end of the policy year. For a voluntary audit, within 30 days of a policy year, you may be asked to complete and submit forms related to payroll. If you don’t comply, you risk giving the carrier latitude to estimate audit figures (which are likely to be higher than the actuals you can provide) and apply penalties equal to 25% to 50% of your premium.

What You’ll Need

To prepare, your organization must keep good records and documentation for the policy period:

• General information including a description of your operations; names and titles of owners and officers; number of employees at each location; and a description of work performed by contractors or subcontractors.
• Job classifications and descriptions providing detailed information about what employees do.
• Payroll records including payroll register; checkbook (if that serves a recordkeeping purpose); accounting ledger; Form 941, Form 944, W-2, 1099 and other tax forms; state unemployment insurance tax reports; hours, days and weeks worked annually; individual earnings, overtime and bonus records; salaries, wages and commissions. (TIP: Separate earnings and overtime for each employee classification, as they impact the premium differently.)
• Financial data including payments to independent contractors and subcontractors, as well as casual laborers, and receipts for materials purchased.
• Insurance certificates for every contractors’ and subcontractors’ Workers’ Compensation coverage.

Take Control

The word “audit” itself is unnerving; however, there are steps that can help you control the process and promote a positive outcome:

• Designate one person to make sure everything is prepared on time for the audit; answer auditor questions; and get answers to any questions he/she may have.
• Be prepared. Auditors work under tight deadlines. Help them move through the audit quickly by having all requested documentation and records accessible and organized. Keep all contractor/subcontractor documentation and information together.
• Do not provide any information, documentation, or records that were not requested.
• Review audit documents carefully. Focus on how the auditor classified employees and the audit’s impact on your business.
• Do not sign anything until you have completed your review. Never sign if the audit documentation is not complete, even if the auditor says he/she will fill it in later.
• Request and keep a copy of any audit documents for your files.

For additional information, refer to the New York Workers’ Compensation Rating Board manual, overview for employers,  employer rights and responsibilities, and website. RBT CPAs’ Visions Human Resource Services affiliate is available to provide advice regarding Workers’ Compensation. What’s more, RBT CPAs, a leading accounting firm in the Hudson Valley and beyond, is ready to take on your accounting, tax, and audit needs with the highest levels of professionalism and ethics. When you engage us to do what we do best, you’re freed up to focus on what you do best – running your business.

Like many states, New York has used the National Council on Compensation Insurance (NCCI) to determine the experience modifier (Mod) for calculating Workers’ Compensation (WC) premiums. After careful evaluation, the New York Compensation Insurance Rating Board (NYCIRB) decided to create its own rating plan and to withdraw from the NCCI interstate rating plan effective October 1. Overall, the NYCIRB rating plan gives employers more incentive (a.k.a., lower WC premiums) to focus on safety and reduce workplace injuries.

The NYCIRB and your insurance company will determine your Mod based on several factors and formulas.

Your business will continue to be assigned a four-digit classification code, which is used to group similar employers. However, under the NYCIRB rating plan, six classifications are being eliminated and integrated into other codes.

To start, the expected loss amount or total anticipated loss during an experience period (the timeframe that the policies being used to determine the Mod were in effect) will be determined. It is calculated for each classification using this formula:

Expected Loss Rate (ELR) X payroll)/100

Then, the results for all classifications are added together to calculate expected losses.

Next, a split point is determined. The split point divides losses for each claim into primary and excess components using a dollar value. Split points vary based on expected losses during an experience period for each classification. They range from $1,000 for the smallest risks to $170,000 for the largest.

The split point is used to determine an employer’s corresponding D-ratio, which is assigned based on the ratio of primary losses to expected losses for each class and risk size.

• Expected Primary Losses = expected losses for the classification X D-Ratio
• Expected Excess Losses = expected loses – expected primary losses
• Actual Primary Losses = reported losses limited by the split point value

Finally, the new modifier (based on experience rather than merit) is calculated:

Mod = (Actual Primary Losses + Expected Excess Losses)/Expected Losses

There’s one more thing that will happen: a new capping methodology which protects against overly harsh Mods will be applied. For one claim, the maximum Mod is 1.12; for 2 claims, the max is 1.4; for 3 claims, the max is 1.75; and for four or more claims, the max is 2 + .000003 X expected losses. For the first year (October 1, 2022 through September 30, 2023), if a Mod under the new plan is more than what it would have been under the prior formula using updated experience by more than .30, the Mod will be capped at the Mod resulting from the prior formula plus .30.

You can find more details in the NYCIRB Experience Rating Plan Manual. For change highlights, including an example and updated rating worksheet, refer to the NYCIRB’s Changes to the Experience Rating Program Explained pamphlet. You may also want to check out the Mod Estimator tool on the NYCIRB’s website and this video explaining the new formula.

It’s definitely a lot to take in but the good news is insurance companies will be doing the calculations. We just want to make sure you’re aware of them because they may result in a decrease (or increase) to your WC premiums come October 1 and give you another reason to focus on your workplace safety efforts.

If you have any questions about this or any accounting, tax, or auditing topic, please don’t hesitate to reach out to RBT CPAs.