Pay-As-You-Go Workers’ Comp?

Advantages of pay-as-you-go workers’ comp insurance include small down payments and convenient, accurate payments. Here are the pros, cons, and what else to know.

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This type of workers’ comp bases premiums on real-time payroll runs

Are you looking for a better way to manage your workers’ comp premiums? If you have a traditional workers’ compensation insurance policy, you probably pay about 25% of the estimated premium in a lump sum at the beginning of the policy. The rest of the estimated payments are spread throughout the year. If your payroll changes rapidly, this type of premium payment arrangement can lead to paying too much for workers’ comp. Fortunately, there is an alternative. It’s called pay-as-you-go workers’ compensation. This type of policy has a premium that’s paid at the same time you calculate your payroll for each pay period. In this article, we’ll discuss the ins and outs of pay-as-you-go workers’ comp.

What is pay-as-you-go workers’ comp?

Pay-as-you-go workers’ comp insurance bases your workers’ comp premiums on real-time payroll runs. For example, if you pay your employees biweekly, you would calculate your workers’ comp premiums for each biweekly payroll at the time you run payroll. This enables you to pay the exact amount due for the relevant biweekly pay period rather than an estimate calculated at the beginning of your policy. If you hire or terminate employees during the policy year, pay-as-you-go workers’ comp factors that in. That way you don’t end up over- or underpaying for your policy.

It’s important to note that a down payment is usually still required for a pay-as-you-go workers comp policy. But it is normally much smaller than the traditional payment model’s amount. In most cases, insurers require just 10% down for this type of policy. The remaining payments are spread out in installments over the policy year. Usually they coincide with when you run payroll and in accordance with your current payroll data.

How pay-as-you-go workers’ comp benefits small businesses

Small businesses can benefit from pay-as-you-go workman’s comp because it offers smaller upfront down payments and premium payments calculated based on actual payroll. Advantages include:

  • Less money down puts less strain on your cash flow and potentially improves your cash reserves for any unexpected business expenses.
  • Predictable payments, since calculations are made according to actual payroll. This decreases the chance of surprise bills throwing off your cash flow at the end of the policy year.
  • Smaller installment payments throughout the policy year let you hold onto your money longer. For instance, you can make weekly, biweekly, or semimonthly payments, depending on how frequently you run payroll.
  • Simpler workers’ comp audits. Audit adjustments are likely fewer, because premium calculations are based on actual payroll instead of estimations.
  • Can lower the risk of penalties. Since your premiums are more likely to be correct, you shouldn’t have to worry about penalties for underpayments or late payments.
  • Can be integrated with payroll. Many payroll service providers and software solutions include pay-as-you-go workers’ comp in their service offerings. This enables you to make automated workers’ comp payments each time you run payroll.

What are the disadvantages of pay-as-you-go workers’ comp?

The pros of pay-as-you-go workers’ comp generally outweigh the cons. Still, it’s important to know the potential downsides of this payment model. Here’s what to consider.

  • Not all insurers offer this payment option. Employers are typically not eligible for pay-as-you-go workers’ comp if they’re located in a state that requires them to purchase the coverage from the state. These states, which are called “monopolistic states,” currently include Ohio, North Dakota, Washington, and Wyoming.
  • Your choice in payroll provider may limit your workers’ comp options. If your payroll service provider uses only 1 insurer, your choices are limited to that carrier. Your payroll provider may also bundle workers’ comp into their payroll services. That could make it difficult for you to know your true workers’ compensation costs.
  • Employers might misconstrue pay as you go to mean no audits. Audits will still be required; they just tend to be less intensive than audits for traditional workers’ comp plans and payments. Keep in mind that workers’ comp audits aren’t only about verifying gross payroll/wages. They also determine accuracy of job classification and whether workers are appropriately covered during the policy period. Even with the pay-as-you-go option, it must be confirmed that you’re paying accurate premium payments and installments.

How to get pay-as-you-go workers’ comp

As stated, many payroll service providers offer pay-as-you-go workers’ comp in their service packages. So if you outsource your payroll duties to a provider, check to see if they provide this payment option. If you don’t outsource payroll, you may use a third-party pay-as-you-go vendor or implement payroll technology that facilitates this model.

How can an individual get workers’ comp insurance?

While it’s not usually required, some independent contractors and self-employed persons may want a workers’ comp policy, even if they carry health insurance. This is because most general health insurance policies exclude work-related illnesses and injuries. To ensure that you’re always covered, it’s wise to look into workers’ compensation insurance for the self-employed and contractors. You can start your search the same way as any other company.

  • Check your state’s workers’ compensation laws to see if a policy is required.
  • Contact your state’s workers’ compensation insurance fund, if available and/or mandatory. If the private insurance carrier alternative is also allowed, compare those options with the state-operated fund.
  • Contact the insurance provider you already use for other personal and business insurance policies.

Choosing pay-as-you-go workers’ compensation insurance can be more affordable for small businesses than traditional workers’ comp plans. Businesses can calculate their workers’ compensation premiums based on actual payroll rather than estimating based on last year’s payroll. It also eliminates the need for traditional lump-sum payments at the beginning of the policy and helps reduce penalty payments at the end. You can also get pay-as-you-go workers’ comp from most payroll providers, which makes this option extremely convenient as well.

However you manage your payments, workers’ compensation coverage should be integrated with your company’s comprehensive employee compensation plan.

Check out our People Ops Podcast episode “Compensation planning; where do I start?”

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