Premium Audit Guide - State Compensation Insurance Fund

1 1 of 6 2022 State Compensation Insurance Fund Premium Audit Guide What is a Premium Audit ? A premi um Audit is a payroll review w e conduct after the policy term expires or after the policy is cancelled. State Fund conducts audits to verify information and calculate a policyholder s final premi um for a specific policy term. When State Fund issues or renew s a policy, we base the premi um for the policy term on anticipated payroll multiplied by rates that are determined by your business operations. The premi um Audit process involves an examination of the policyholder's records to establish the actual payroll and to make sure the correct classification codes are used in determi ni ng the final premi um. Because the original premi um w as an estimate, the Audit may result in a change of premi um and / or classifications for the business.

2 Informati on from the Audit w ill generate either a bill or a re fund. Types of audits Field Audit A field Audit is an on-site review of the business records and possible inspection of business location(s) by a State Fund Auditor or a designated premi um Audit vendor. In-House (Telephone/Mail-in) Audit We may ask policyholders to complete an Audit by e6901 ((Rev 01/22) telephone, f ax, email, or mail. We w ill request supporting records, such as payroll records and copies of the business' quarterly tax reports. Information requested at time of Audit Below are examples of the inf ormation an auditor may request at the time of an Audit . Additional inf ormation may be required to complete the Audit , depending on each business' specif ic issues. General information Description of com pany operations Officers/ow ners nam es, titles, and percentage ofshares/ ow nership Em ployee nam es, titles, and job duties Num ber of em ployees at each locationPayroll information Gross pay, including bonuses, commissions, holidaypay, sick pay, vacation pay, and all pretax am ounts Pretax/Section 125 am ounts, 401 K Overtim e pay show n separatelyPlease refer to the Premium Audit Checklist for the types of records to be made available for the Audit .)

3 Subcontractor information Nam e of Subcontractor Contractors State License Num ber (where applicable) Business License, Public Utilities Com mission(PUC) License/Permit (where applicable) Certificates of Insurance covering the time2 of 6 2022 State Compensation Insurance Fund period the services were provided Copies of project contracts and invoicesTax information to verify payroll/sales records Form s 940, 941, 1096, 1099, W-2, W-3 Incom e tax return State unem ploym ent Insurance (SUI) quarterlyreturns (DE-9/DE-9C)Sales Profit and loss statement General ledgerAdditional information typically requested for restaurants Tips show n separately Num ber of free m eals given to employees Inform ation about Live entertainmentPayroll as a Premium basis Workers Co mpensation Premium is are most often based on payroll Payroll includes, but is not limited to: hourly and salaried payroll, bonuses, holiday pay, sick pay, vacation pay, commissions, piece w ork, market value of gi fts, and profit- sharing.

4 Also included in the payroll premi um base are: Meals and housing for employees, expense allow ances not based on receipt s, employee contribution to Deferred Compensation plans, payout of Deferred Co mp ensa tion to current employees and employee s contribution to Stock Option plans. Payroll does not include tips, overtime excess, severance pay, expense reimbursements based on receipts, third -party sick pay, salary reductions to fund the w el fare or fringe-benefit portions of Section 125 cafeteria plan, personal use of a company auto and certain company perks (such as incentive vacations, club memberships or tickets to entertainment events). Employer contributory payments, including group Insurance , Employer contribution to Deferred Compensati on plans and stock purchase plans are not subject to premi um co mputation.

5 Premium Audit Disputes The Audit is only the initial step in determi ni ng premi um. Auditors do not have the information or payment history necessary to determi ne if the Audit w ill result in a bill or a re fund. Dispute Resolution Process: 1. If a policyholder believes an Audit is incorrect, theye6901 ((Rev 01/22) should submit a w ritten statement detailing the specif ic inaccuracies. 2. Email disputes and supporting inf ormation claim of inaccurate Audit inf ormation must besupported by a detailed explanation of the inaccuraciesin the Audit and w hat the corrections should of original f inancial and / or other records thatsupport the discrepancy must cover all disputed inf ormation. Policyholders f iling a dispute may include spreadsheets outlining the disputed inf ormation, but those spreadsheets w ould need to be supported by source documents.)

6 W e receive your supporting documents, w e w illreview them and determine if the Audit should be revised. If a revision is w arranted, w e w ill place a temporary hold on the outstanding bill. The policyholder must continue to pay all other billing invoices by due dates to avoid cancellation of the policy. ritten or non-specif ic claims of dispute are notconsidered an of f icial Audit dispute. If the dispute notice isnot supported or is vague, w e w ill not place the Audit billon hold and the policy may be subject to cancellation ifthe bill is not paid by the due of Common Audit Issues: Officer exclusions: Of f icers or directors are excluded f rom coverage w hen: the of f icer or director ow ns at least 10% of thestock and they sign and return the Waiver ofWorkers Compensation Form OR the of f icer or director ow ns at least 1% of thestock, is a direct relative (parent, grandparent,sibling, spouse or child) of someone w ho ow nsat least 10% of the stock, is covered by a healthinsurance policy or health care service plan, andsigns and returns the Waiver of Workers Compensat ion Form OR the ow ner is a practitioner rendering prof essionalservices f or w hich the prof essional corporation is3 of 6 2022 State Compensation Insurance Fund organized and that ow ner is covered by a health Insurance policy or a health care service plan and they sign and return the Waiver of Workers Compensat ion Form.

7 Subcontractors & Independent Contractors: Most states require the employer to provide workers Compensation Insurance coverage f or uninsured contractors and subcontractors hired. To avoid being charged Premium f or these contractors, the insured must provide proof of a valid workers Compensation Insurance policy issued to the contractor , or proof of their exemption f rom Worker s Compensat ion. Policyholders must also provide a valid license f or the subcontractor, w hen required by State law . Standard Exception Classification Code 8810: Clerical In order to qualif y f or the Clerical classif ication, the duties of clerical of f ice employees must be limited to general of f ice w ork. The employees must be located in an area that is physically separated f rom all other w ork areas and operations of the business.

8 No payroll division is allow ed betw een clerical and any other classif ication. Some classif ications specif ically cover all operations of the business, including clerical of f ice employees and do not allow us to assign class 8810 to any employees. Standard Exception Classification Code 8742: Salesperson Outside - The duties of outside sales employees must be limited to solicitation, collection activities, or meeting w ith clients outside the of f ice. The balance of their time can be spent in the of f ice, perf orming clerical duties. No payroll division is allow ed betw een outside salesperson and any other classif ication. If they have duties of any other nature, they w ill be classif ied accordingly and w ould not qualif y f or classif ication 8742. Frequently Asked Questions What happens if a policyholder does not comply with a Premium Audit ?

9 If the policyholder fails to comply w ith a Premi um Audit , State Fund may cancel the current policy, w hich may have a negative impact on experience modification. State Fund may also esti mate the policy s final premi um, w hich may result in additional Premium due. e6901 ((Rev 01/22) If a policyholder works alone, has no employees and no payroll records, is the Audit still necessary? Yes. The auditor w ill need document ation to verif y that inf ormation and may also look at disbursement records, bank statements, cancelled checks, or income tax returns. The auditor w ill also review inf ormation relative to any independent contractors used during the policy period. What if I pay my employees in cash? If you pay your employees in cash instead of payroll checks, you must keep a log of the cash payments, the hours w orked, the dates paid, the amounts paid, and the f irst and last name of each employee.)

10 Otherw ise, all cash w ithdraw als f rom your bank account may be included f or computing w orkers' Compensation Premium . Are payments reported on 1099s subject to Premium ? Payments to uninsured and / or unlicensed w orkers reported on 1099s may be subject to Premium and may be included in the Audit as payroll. Determination is made on a case-by-case basis. The auditor may require additional inf ormation to assist in that determination. 4 of 6 2022 State Compensation Insurance Fund For the trucking industry, please provide the f ollow ing additional inf ormation f or drivers not on regular payroll to the auditor: List of paym ents m ade to drivers USDOT / MCP for drivers DMV Registration for ALL drivers paid/CAB Card Verification of num ber of trucks owned by insured Lease agreement for driversIs an Audit still required when a policy has been cancelled?