How to prepare your annual premium audit
The instructions below will assist you in filling out the audit form for your annual insurance audit. Each section of the audit form is numbered and the sections shown below correspond to the section numbers on the audit form.
Section 1 – Gross Wages is information for each employee who is reported for taxes and unemployment. Anyone who receives FICA wages must be reported here, both active and terminated employees. There are several different ways to think about this number and they are all really the same thing:
a. It is the total of Section 3 (officers) and Section 4 (employees) on the form.
b. It is the total of Medicare wages + pretax (section 125) wages
c. It is sometimes referred to as Total Earnings and includes active and terminated employees
d. It represents the total amounts paid to employees including 401K and section 125.
Section 2 – Wages from Federal 941 form (line 5c Medicare wages) you will need the reports that were filed during the quarters your policy was in force so that you can record the total gross payrolls reported and compare these to the total earnings from the payroll system.
a. The two numbers should match after quarterly gross amounts are adjusted for any time difference between your policy period and the calendar quarters used. When the auditor’s visit you, they always calculate the gross payrolls for the odd weeks that your policy dates differ from calendar dates, then add and subtract the odd amounts to verify the totals match.
b. Adjustments for section 125 amounts if not included in the unemployment gross reported are important since section 125 payments and 401K payments must be included for insurance audits, but are not always included for unemployment reporting depending on what state you are doing filings in.
c. Medicare wages + Pretax deductions = Total earnings
Section 3 - Officer and Owners information for the business is very important. Corporate officers, sole proprietors, and members of LLCs are all treated differently in each of the 50 states so it is vital that the auditor knows what type of company you operate.
a. You should clearly indicate the name, title, earnings if a corporation, and type of work the officer does.
b. Be sure and list the actual tasks the owner does rather than just a job title.
c. The only officer to list is someone who is listed in a corporate resolution as an officer, so do not list appointed officers who have a title but are not formally named in the corporate resolution.
Section 4 – Employee Payroll is needed for each employee, with separate totals for each different state the employee worked in and each different type work that has a unique workers compensation classification code.
a. If an employee does more than one type of job and you keep records of amounts paid for each type of work you should report the employees payroll in that manner.
b. If you are allowed to split the employee’s wages into different workers compensation classes the audit department will make sure the payrolls are allocated correctly.
c. There are adjustments allowed for overtime paid, tips documented for restaurant employees, and certain imputed income amounts. Adjustments are amounts that will be deducted from payroll before calculating the final premium. These adjustments are different for every state and the auditor will be familiar with what adjustments apply in what states.
Special types of earnings include:
d. Overtime-the auditor will adjust the pay to deduct any overtime in excess of straight time pay
e. Other common adjustments:
Severance paid
A uto reimburse ments of actual expenses
M ost fringe benefits the IRs consider income,
3rd party sick pay,
IRS imputed income amounts such as personal use of company car.
f. In addition in California Section 125 and 129 amounts deducted are excluded from payroll, in all other states these amounts are included.
Report these amounts and the audit department will know how to treat the deductions.
Section 5 – Subcontractor’s cost are businesses that you hire to perform a service for you. True subcontractors are in business for themselves and have their own insurance to cover their operations.
a. Provide the subcontractor’s company name and total you paid them during the policy term
b. Provide a copy of the subcontractor’s certificate of insurance that covers the policy term.
c. Make sure you get certificates of insurance for all subcontractors, since they will be included as employees if they cannot provide proof of insurance. All subcontractors who are in business for themselves are potential employers and should have workers compensation policies in force.
d. If subcontractors have no employees the subcontractors receive refunds of most of the premium paid for those workers compensation policies so there is no reason to be in business without a workers compensation policy!
e. General liability insurance is also essential for a true business to operate, and a subcontractor who works for you without being properly insured will be included on your audit as an employee.
Section 6 - Cash payment s – sometimes a business will pay a person cash wages but not report those wages for FICA or tax with holding. Such a person is considered an employee for workers compensation and is entitled to coverage from your insurance policy so must be included on the audit. List each cash worker along with the type of work they did and the auditor will know how to include that worker for the audit.
Section 7 – Sales/Revenue information is used for general liability policies for retail and manufacturing businesses. It is often easier to include an income statement than to list sales separately especially if you have several class codes on your policy.
a. If your gross sales include sales tax be sure to list the tax also, because taxes collected and remitted to the government are not included for insurance calculations.
b. Returned merchandise is also not included, however discounts are included in the calculated premium.
Description of Operations/business explaining what your company sells and what the processes are is very helpful for underwriting and helps ensure your premiums are accurate. If you include the type of business, retail or wholesale, tools and equipment used and business processes, the underwriter can get a better idea about your specific company. This can be included at the top of page 2.
That's it! That is all that is needed to complete the audit process every year, and if you ever need help please feel free to call anytime.
Premium Audit checklist
1. Assemble payroll information including quarterly unemployment compensation reports
2. Assemble amounts paid to subcontractors and certificates of insurance for workers compensation and general liability for all subs
3. Have income statement info for sales based general liability policies
4. Select a format - spreadsheet, form, or call from telephone auditor
5. Provide the information
6. Call any time with questions
Copy write VISTA Resources Inc Jan 2009 847.398.1172