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Unique Workers’ Compensation Service Designed Specifically for Small Businesses

As trusted advisors to small businesses, accounting professionals are in a unique position to provide advice and information to their clients on how to manage the burden of workers’ compensation insurance.

November 12, 2007
Sponsored by ADP Small Business Services

Key Benefits for CPAs and Their Clients

Workers’ compensation insurance is supposed to bring peace of mind to the employer and the employee alike. In the event of an on-the-job injury or illness, an insurance company handles the claim and pays all or most of the attendant costs. Yet, for many small businesses, traditional insurance policies are a huge headache, difficult to administer and financially burdensome. In fact, workers’ compensation ranks among the top concerns of small businesses.1 As trusted advisors to small businesses, accounting professionals are in a unique position to provide advice and information to their clients on how to alleviate the burden of workers’ compensation insurance.

While workers’ compensation systems vary from state to state, coverage is compulsory in all states, except Texas, as a prerequisite to employing a workforce. Under some state laws, business owners are also responsible for independent contractors and subcontractors while on the job.

Workers’ compensation insurance covers the cost of medical care and rehabilitation for workers injured on the job, and compensates them for lost wages. It also provides death benefits for their dependents if a work-related accident or terrorist attack results in their death. While the frequency of workers’ comp claims has fallen dramatically in recent years, the size of lost-time claims keeps increasing annually, due to skyrocketing prescription drug and medical costs. According to a 2007 report from the nonprofit National Council on Compensation Insurance (NCCI), the “open-ended nature” of workers’ compensation has led to medical costs that have increased at or near double-digit rates annually — on average nine to 12 percent.2

To meet their legal obligations, employers either self-insure, or purchase workers’ compensation insurance. Small businesses generally opt for insurance rather than risk even one major claim, especially in a post-9/11 world where terrorism coverage includes both domestic and foreign events. Yet instead of delivering peace of mind, traditional workers’ compensation policies bring uncertainties to owners of a small organization.

Traditional Workers’ Compensation

Small businesses interested in obtaining workers’ compensation coverage traditionally contact their local insurance agent, or ask for a recommendation from their accountant or business associates. The insurance agent will attempt to secure the coverage from a network of insurance carriers. Once an insurance carrier accepts a client, the Estimated Annual Premium (EAP) is calculated by multiplying the carrier’s rate by the estimated payroll expenditure for the year. The EAP rate is based on the number of covered employees and their job classification code, which is assigned by the type of business and its industry risk profile.

This is where the challenge begins. Businesses are dynamic, and subject to change. In contrast, the EAP is based on a static snapshot of your workplace dating back to when the policy was negotiated. Based on this yearly estimate, the client must make a large upfront payment, usually upwards of 25 percent of the EAP. The remainder is paid out in four to 10 additional payments throughout the year and is calculated by multiplying the carrier’s rate by the estimated payroll expenditure for the year. Many entrepreneurs and small business owners have their money tied up in the business, and with many seasonal businesses, there are cash flow concerns. Paying coverage in big installments can pose a problem, and since the calculation is imprecise, the end of the year can bring unwelcome news.

At year-end, the owner or the accountant must collect all the annual payroll data to conduct a final audit to determine what was paid versus what is actually owed. Almost unavoidably, the audit will uncover an imbalance, either in the form of an underpayment or overpayment. While getting money back at the end of the year might feel like an unexpected windfall, on closer examination, the business lost an opportunity to either collect interest or use that money as a business investment. Underpayments can amount to thousands of dollars. In either case, there is an abundance of paperwork needed to reconcile the account with the insurance carrier.

A More Convenient, Accurate Approach

As a national provider of payroll services, ADP is in a unique position to develop a more equitable and accurate workers’ compensation premium payment solution. Offered in partnership with leading insurance carriers, ADP’s Pay-by-Pay® Program for Workers’ Compensation premium payment service is a simple, effective and convenient service that helps to improve cash-flow and eliminate the confusion associated with managing workers’ compensation insurance.

With the Pay-by-Pay Workers’ Compensation service, premium payments are integrated into the regular payroll cycle. Like the proverbial “horse and carriage,” the two services work in perfect tandem. After all, an injured worker’s weekly income benefit is based on his or her regular pay rate. Additionally, as an integral part of normal business operations, the payroll database is the go-to source for up-to-date information on an employee’s salary and work schedule.

With this service, premiums are remitted by ADP directly to the insurance carrier. This eliminates both the need for the large upfront payment, and the risk of late payment cancellations.

ADP supplies insurance premium reports after each pay period that detail workers' compensation expenses, including individuals on the policy, their subject wages, and the current premium due. This ensures accurate recordkeeping. If an audit is still deemed necessary, the risk of audit adjustments is greatly reduced as premium payments — just like employee tax obligations — are calculated throughout the year based on real-time, accurate payroll data.

Keeping in mind that accountants are often the one to perform the year-end audit, the regular reporting is an extremely valuable tool. Instead of collecting all the yearly payroll data, the information is readily available and accurate, making the audit process quick and simple. Having these reports throughout the year also helps accountants work with their small business clients to evaluate if the insurance plan chosen is meeting their needs, and how to navigate future plans.

Since this solution is based on a joint service agreement with an insurance carrier, the Pay-by-Pay product is only available to ADP payroll clients, and the workers’ compensation payment service typically can be up and running within 48 hours. The service is available in every state in the continental U.S., except Washington, North Dakota, Wyoming and West Virginia where the state runs the workers’ compensation program. The ADP Pay-by-Pay service now is offered directly from the Ohio Bureau of Workers’ Compensation (BWC) to interested businesses.

ADP designed its Pay-by-Pay Workers’ Compensation service specifically for businesses with 250 or less employees. To determine its workplace impact, ADP surveyed its small business clients nationwide. They reported a reduction in the time spent on workers’ compensation administration in almost 60 percent of cases.3 Staff time related to paperwork, premium calculations, and year-end audits and adjustments has been halved on average. The year-end audit process is a breeze, and the need for carrier reimbursements and client payment requests is substantially reduced through more accurate monthly remittals. A majority also found their yearly premium had been reduced.

Now that’s peace of mind.

For more information, please visit: www.paybypay.adp.com

1 Inc.com. “Workers’ Compensation Costs Big Concern for Small Businesses: Problem Is a State-by-State Issue,” by Matt Quinn, September 23, 2004.

2 “Workers Compensation Market Outlook — 2007,” by Stephen J. Klingel, CPCU, Workers Compensation Issues Report, NCCI Holdings, Inc. Web site.

3 ADP SBS Workers Compensation Client Study — January 2005.