Glossary
Workers' comp premium audit terms, explained.
25terms that come up in a workers' compensation premium audit, defined in plain English. Written for the business owner reading an audit notice for the first time, and for the underwriter who wants the definition to be exact.
Audit basics
- Form 941also called quarterly federal tax return, 941
- Form 941 is the quarterly federal tax return on which an employer reports wages paid and payroll taxes withheld, and it is the document a premium audit reconciles payroll reports against.
- Policy periodalso called policy term
- The policy period is the span of dates a workers' compensation policy covers, and it is the window every figure in a premium audit must be drawn from.
- Premium auditalso called workers' compensation audit, payroll audit
- A premium audit is the review a workers' compensation carrier performs at the end of a policy period to replace the estimated payroll the policy was priced on with the payroll the business actually paid.
Classification & payroll
- Audit basisalso called premium basis, payroll basis
- The audit basis is the final payroll figure, by class code, that premium is calculated against once inclusions and exclusions have been applied.
- Class codealso called classification code, workers comp class code
- A class code is a four-digit number that groups businesses or job duties by the hazard of the work, and determines the rate applied to payroll assigned to it.
- Division of payrollalso called class code split, payroll allocation
- Division of payroll is the practice of splitting one employee's wages across multiple class codes when they genuinely perform work in more than one classification.
- Election in or outalso called officer exclusion, owner coverage election
- Election in or out is the choice owners and officers make about whether they are personally covered by their business's workers' compensation policy, which in turn determines whether their pay counts toward premium.
- Governing classification
- The governing classification is the class code that best describes a business's principal operation, and the one that carries the most payroll aside from standard exceptions.
- Officer payroll capalso called officer minimum and maximum, owner payroll limits
- An officer payroll cap is a state-set limit on how much of an included officer's or owner's compensation counts toward workers' compensation premium, with a floor as well as a ceiling.
- Overtime premium exclusionalso called overtime excess
- The overtime premium exclusion removes the extra portion of overtime pay from the audit basis, so an employee paid time-and-a-half is rated on their base hourly rate rather than the premium rate.
- Remunerationalso called payroll for workers comp, rateable payroll
- Remuneration is the workers' compensation term for all compensation that counts toward premium, which is broader than take-home pay and broader than what most businesses think of as payroll.
Contractors
- Certificate of insurancealso called COI, cert of insurance
- A certificate of insurance is a document showing that a subcontractor carried their own workers' compensation coverage, and it is the evidence that keeps payments to them out of the hiring business's payroll at audit.
- Uninsured subcontractoralso called uninsured sub, 1099 contractor without coverage
- An uninsured subcontractor is anyone paid for work who cannot show they carried their own workers' compensation coverage, and whose payments most states therefore allow a carrier to treat as the hiring business's payroll.
Audit types
- Physical auditalso called on-site audit, field audit
- A physical audit is a premium audit conducted on site, with an auditor visiting the business to examine payroll and financial records in person.
- Telephone auditalso called phone audit
- A telephone audit is a premium audit conducted by interviewing the insured over the phone, with figures reported verbally and documents sometimes supplied afterward.
- Virtual auditalso called remote audit, virtual premium audit
- A virtual audit is a premium audit conducted remotely, with the insured supplying native digital records through a secure channel and the auditor working from those source documents directly.
When things go wrong
- Estimated auditalso called forced audit, non-compliance audit
- An estimated audit is the premium determination a carrier issues when an insured does not cooperate with the audit, calculated from assumptions rather than from records.
- Non-compliance chargealso called audit non-compliance penalty
- A non-compliance charge is an additional amount many states permit a carrier to add when an insured fails to cooperate with a premium audit, applied on top of the estimated premium.
- Premium leakage
- Premium leakage is earned premium a carrier never collects because exposure was understated, misclassified, or missed at audit.
Preparing for an audit? The audit checklist generator builds the document list around your own policy dates, and the blog covers the mechanics in more depth.