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Pay-as-You-Go Workers' Comp

Updated: May 17, 2022

As an employer, you’re always looking for areas of your business where you can cut costs. One of the largest costs for a business is labor. Depending on the industry, labor can account for up to 70% of total costs, including employee wages, benefits, insurance, payroll, and other employee-related taxes. Aside from wages, workers’ comp makes up a significant portion of labor-related costs. Traditional workers' compensation programs are notorious for inaccuracy and causing cash flow problems. Pay-as-you-go workers' compensation can help relieve these issues while saving you money.

What is Workers’ Compensation?

Workers' compensation, also known as "workers' comp," is an employer-provided insurance plan that reimburses employees for lost income and medical expenses incurred as a result of a workplace injury or illness. Workers' compensation also covers disability benefits, rehabilitation, and retraining costs, as well as death benefits for individuals who died as a result of a workplace injury or sickness.

Because workers' compensation is state-mandated insurance, individual states regulate which firms must carry coverage, what constitutes a work-related accident or illness, and how premiums and claims are handled. Although a few jurisdictions exclude firms with 5 or fewer employees from workers' compensation rules, most states require all employers (regardless of size) to be covered. While most states allow companies to buy workers' compensation from private insurers, a few states require employers to buy it from the state directly.

Purchasing a Traditional Workers’ Comp Policy

Employers have traditionally had to make a lump-sum payment to the insurance carrier. The down payment is typically equal to 25% of the expected gross payroll/wages for the policy year. The remaining amount/premiums are paid by the employer on a monthly or quarterly basis. The crucial word here is "estimated," which means premiums are calculated on estimates rather than real payroll data.

Most states require insurers to audit their workers' compensation plans, and the insurers, in turn, include audit terms in their contracts. These audits are designed to examine if the employer paid the correct amount of premiums for the correct level of coverage.

Audits usually take place at the end of the policy year. The insurer checks the employer's actual gross payroll vs what they paid based on their initial estimate. If the employer overpaid, the insurer reimburses them or credits the excess on the employer's workers' compensation policy for the following year. The insurer would bill the employer for the difference if the employer underpaid.

Cons of Traditional Workers’ Comp Policies

Although workers’ comp is necessary, it may be causing business challenges.

1. Cash Flow Issues

Traditional workers comp policies require a large, upfront deposit. This could hurt cash flow, especially if you’re on a tight budget. Also, if you overpay one year, the carrier will typically roll over the credits to the following policy year, thus reducing cash flow further.

2. Overpaying

Because the policy amount is based on estimated payroll, you could end up overpaying. If an employee quit and your payroll shrinks during the policy year, you’ll end up overpaying since the policy does not account for reductions in payroll.

3. Underpaying

Similar to the overpaying scenario, you could end up underpaying. If you hire additional employees during the policy year, you’ll end up underpaying since the policy does not account for additions in payroll. You’ll also get sent an additional bill from your carrier.

4. Audits

Since premiums are based on payroll estimations rather than exact data, carriers may audit your policy to ensure that you are paying the correct amount. Audits are time-consuming and can disrupt your business.

A pay-as-you-go workers comp policy will help solve these issues.

What is pay-as-you-go workers’ comp?

Premiums for pay-as-you-go workers' compensation are based on real-time payroll runs. If you pay your employees on a bi-weekly schedule, workers’ comp premiums would be calculated for each bi-weekly pay period when you run payroll. This allows you to pay the exact amount due for that particular pay period. Pay-as-you-go workers' comp takes into account changing payroll amounts throughout the policy year and only charges you exactly what you owe based on real payroll data. Because premiums are tied to payroll data, you only pay for coverage for workers who worked during that pay period.

Pay as you go workers comp also avoids the large, upfront down payment. Depending on the coverage, some form of down payment may be required, but it is usually a much smaller amount than traditional plans. Any remaining payments are spread out in installments over the year.

Pay-as-you-go Workers Comp Advantages

1. No Large Down payment

Avoiding a large down payment helps increase your cash flow, so you can deal with any unexpected business surprises.

2. Consistency

Since premium calculations are based on payroll, this limits the chance of surprise bills popping up. This also keeps your expenses consistent since you only pay workers comp for employees that are on the payroll for that pay period.

3. No Audits

Since workers comp is directly integrated with payroll, there is no need for audits. This is because the premium calculations are based on actual payroll data rather than estimates.

4. Maintain Compliance

With the integration of payroll, your workers’ comp payments are going to be much more accurate. Paying the correct amount helps you avoid fines or late penalties.

Pay as you go Workers Comp Disadvantages

1. Some states don’t allow pay as you go workers’ comp

There are several states that are considered “monopolistic states” when it comes to workers comp. These states are North Dakota, Ohio, Washington, and Wyoming. If you do business in any of these states, then you cannot purchase a policy from a private insurer. Instead, employers have to purchase coverage from a government-operated fund. Government-operated funds don’t offer pay-as-you-go coverage.

2. Extra Reporting

If you are doing payroll in-house, you'll have to be responsible for inputting the premiums every pay period. This extra work can quickly add up and become a distraction to higher-priority business operations. Because of this, many businesses decide to outsource their payroll. Outsourcing payroll can save you hours a week but will cost you fees.

How to get pay as you go workers’ comp

Some payroll providers may offer pay-as-you-go workers comp as part of their services. A Professional Employer Organization (PEO) is also a great choice for employers looking for a pay-as-you-go plan. In fact, PEOs were the first to bring the pay-as-you-go workers comp plan to market.

PEO firms offer pay-as-you-go workers' compensation as well as outsourced benefits and a number of resources to assist you with employment-related concerns and administrative paperwork. In reality, many businesses with fewer than 100 employees should be able to significantly reduce their administrative burden in-house by partnering with a Professional Employer Organization.

The Cornerstone Advantage

Aside from offering a competitive pay-as-you-go plan, Cornerstone PEO can also help you save significantly on workers comp costs and help lower your experience modifier. With our current clients from 2019 to 2021, we’ve helped save them an average of 22.4% on workers comp costs.

For more details of how a PEO can help reduce workers comp costs, click here.

Like other PEOs, Cornerstone will help you save significantly on employee benefits, automate your payroll, lower your experience modifier, and help with certain employee-related compliance. However, unlike other PEOs, our focus is on excellent customer service.

Other PEOs will just add you to their system and send you an invoice. At Cornerstone, we assign a professional customer service rep to work with your account. This not only adds more of a human touch, but it also allows us to create custom solutions unique to your business. Got questions? We have a rep to help you answer them. A problem occurred? You have a rep who understands your business and can create an effective solution.

Contact us here for a FREE consultation.

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