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What is workers compensation insurance and how does it workHome/What is workers compensation insurance and how does it work Charles Read, CPA, USTCP, IRSAC Workers’ compensation insurance is not strictly a payroll function. But if you have employees on payroll in any state except Texas, you may be required by law to carry it. So let’s examine it because if you have payroll you will almost always have workers’ compensation insurance. WHAT IS WORKERS’ COMPENSATION INSURANCE? Workers’ compensation (referred to often as workers’ comp) is a form of accident insurance paid by employers. No payroll deductions are taken out of employees’ earnings for this insurance. If an employee is injured on the job or acquires a work-related illness, workers’ comp will pay the employee’s medical expenses. If the employee is unable to work it will also provide wage-loss compensation until the employee is able to return to work. Benefits are usually paid by a private insurance company or state-run workers’ comp fund. It also provides benefits to dependents if a person dies as a result of a job-related injury. Not all employees are covered by state workers’ comp insurance. Some federal employees are covered by other compensation laws administered by the US Department of Labor (DOL) or other special cases or occupations. Energy Employees Occupational Illness Compensation Program, the Federal Employees’ Compensation Program, the Longshore and Harbor Workers’ Compensation Program, and the Black Lung Benefits Program serve the specific employee groups. Some states and municipalities have an in-house program to cover workers’ comp claims. State Rules Cover What? When an employer must get and keep coverage in place. What Injuries Are Covered? The work-related injury does not have to stem from a single instance. Repetitive stress injuries and conditions caused by long-term exposure to environmental hazards may be covered if the state specifies them. Employees may not need to be at the work site to be covered. If the employee is involved in a work-related task at the employer’s direction and receives an injury they may well be covered. Normally injuries while commuting are not covered. Some states allow employees to be tested for substances such as alcohol or drugs which would have rendered the employee unfit to be working. If these substances are self-administered, the employer may be held not liable and the employee will be unable to collect benefits from a workers’ comp policy. Workers’ comp normally does not usually cover self-inflicted injuries or intentional acts. It may not also cover injuries deliberately caused by other employees or other parties. Exclusive Remedy Employer Responsibilities Post notices of coverage. Employee
Responsibilities MONOPOLISTIC STATES VERSUS NONMONOPOLISTIC WORKERS’ COMP STATES North Dakota, Ohio, Washington, and Wyoming do not allow private insurance companies to sell workers’ comp policies in their states. These states are referred to as monopolistic states because employers must purchase workers compensation coverage from a government-operated insurance fund in that state. Unlike a competitive fund, a monopolistic state fund is the sole source of workers’ compensation insurance in the state. It has no competitors because private insurance is not permitted. Other states allow private companies to sell workers comp policies based on market forces. The state still sets requirements and coverage terms but not price. The employer is required to carry coverage by law. All states have assigned risk pool for companies where the company’s calculated risk is too high for an insurance company to want to underwrite. This pool will use one of several mechanisms to provide coverage to those companies that cannot otherwise obtain the workers’ comp coverage required by the state. COST OF WORKERS’ COMP COVERAGE Class codes Class Code As you would expect there are times where codes do not match the actual job and something similar has to be used until the state sets up a new class code. This can cause problems, see the “Dirty Little Secret of Workers’ Comp” further on. Payroll Wages or salaries including retroactive wages or salaries. Tips and other gratuities received by employees. Claims History /Experience Modification
(Mod) The actual process of calculating the experience mod is complex, but the purpose of the formula is pretty straightforward. Here’s how it works: your company’s actual losses are compared to its expected losses by industry type. Factors taken into consideration are: company size, unexpected large losses, and the difference between loss frequency and loss severity. The experience mod for your company is calculated by the National Council on Compensation Insurance (NCCI) or in some states, by an independent agency. Experience rating is a required step that applies to all employers that meet a state’s premium eligibility criteria for the plan. The experience mod modifies your premium. If you have a mod greater than one because of your company’s claim history your premium will be modified upward, increasing your cost. If your company has a lower-than-average claims history then your experience mod will be less than one and when applied to your premium it will lower the overall costs. How to Maintain a Low Experience Mod The mod is more sensitive to many small claims rather than an occasional big one. Premium Calculation Premium is based on each $100.00 of wages paid. The class code determines the base premium rate for the wages You have an employee with a class code of 8810 which is a Clerical Office Employee NOC (not otherwise classified). A rate for that clerk might be $0.35 per hundred dollars of earnings. So if you pay that clerk $25,000 per year your workers’ comp premium would start at $87.50 per year. ($25,000.00 / 100 = 250. 250 × $0.35 = $87.50). If you have no modifier, then that is your premium for that clerk. You have an employee who does commercial roofing with a code of 5551, which is Roofing – All Kinds (Commercial). A rate for that employee might be $5.40 per hundred dollars of earnings. So if you pay the employee $25,000.00 per year your workers’ comp premium would start at $1350.00 per year. ($25,000.00 / 100 = 250. 250 × $5.40 = $1350.00). If you have no modifier, then that is your premium for that roofer. If you have a poor claims rate and an experience modifier of 1.25, the premium would rise to $1687.50 ($1350.00 × 1.25 = $1687.50). Rates can vary from a few cents per hundred dollars of wages paid to over $12.00 per hundred dollars of wages paid before any experience modification. Payment of Premium Pay as You Go There are substantial advantages to everyone in a pay-as-you-go system. The carrier does not have to calculate possible premiums for deposits, and they don’t have to do an audit every year. They also don’t have to issue refunds for overpayments or chase down clients for additional premium amounts. For the employer, there is no deposit, no audit, and they pay exactly what is due based on actual payroll and not a penny more. Interested in learning more about GetPayroll services?Are you shopping for new payroll services? Schedule a demo to see if GetPayroll is right for your business. If you are a current GetPayroll customer (yay!), take a look at some of our new services that may help streamline your business operations. Comments and SuggestionsDon’t forget to leave us a comment below and tell us what you think. If you have any requests or suggestions, we’d love those too! Share This Story, Choose Your Platform!Related PostsWhat is the most common cause of workers compensation?Cuts and Punctures
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