Pay-As-You-Go Workers' Comp and Payment Plans for New Owners

Pay-as-you-go workers' comp bills your premium every payroll cycle based on the wages you actually paid, instead of asking for a large deposit up front and settling the difference at audit months later. For a new owner carrying acquisition debt, that usually means less cash out at closing and a smaller audit bill. It does not remove the audit. It is not offered by every carrier or in every state, and it only works if your payroll is coded correctly. This guide is for buyers choosing between pay-as-you-go and the annual, quarterly or monthly payment plans on a new or inherited workers' comp policy.

How does pay-as-you-go workers' comp work?

A standard workers' comp policy starts with an estimate. The insurer takes your estimated annual payroll in each class code (the code that describes the type of work and sets the rate), divides it by 100 and multiplies by that code's rate. It adds up the codes and applies your experience modification factor (the "mod", which adjusts premium for your past claims). Then it adds or subtracts other items, such as schedule credits, premium discount, an expense constant and state charges. You pay that estimated premium up front or in installments, and after the policy ends the insurer audits your real payroll and bills or refunds the difference.

Pay-as-you-go changes the timing. Your payroll provider sends the insurer your payroll by class code each time you run payroll, and the insurer collects premium on that payroll, usually by automatic debit. For example, a $40,000 payroll week produces a smaller payment than a $60,000 payroll week (illustrative amounts). Some programs still ask for a modest deposit at the start, and the policy still shows an estimated annual premium on the information page (the workers' comp version of a declarations page).

Three things do not change:

• The audit. The standard policy lets the insurer audit your records during the policy period and for up to three years after it ends. Carriers may accept the pay-as-you-go payroll reports at the year-end audit, but they keep the right to do a deeper one.
• The rates and the mod. Pay-as-you-go changes when you pay, not what the rate is. Your mod usually follows the business you bought, so it applies here too.
• Availability. It works only with carriers and payroll providers that have set up the connection, and not in every state. Some state assessments may still be billed separately.

How does it compare with deposits and installment plans?

New owners usually have up to five ways to pay for workers' comp. The total premium for the year is set by payroll, rates and the mod in every case. What differs is how much cash leaves at closing, what the extras cost, and how big the audit adjustment can be.

Financing deserves its own look before you sign anything; see premium financing for new owners.

Why does it shrink audit surprises after an acquisition?

Many audit bills after a deal come from payroll growth the policy never heard about: new hires, raises, retention bonuses and a general manager's salary. On a deposit-based policy, that extra payroll is billed in one lump months after the policy ends. On pay-as-you-go, premium on the extra payroll is collected as you pay it, so most of the true-up happens during the year.

A hypothetical example. A buyer closes on a home services company and expects $1.5 million of payroll for the year. With an illustrative blended rate of $4.00 per $100 of payroll and a mod of 1.00, the estimated premium is $60,000. Actual payroll grows to $1.8 million after new contracts start. The rate and numbers are made up for the example.

In all three cases the premium for the year is about $72,000, before any fees. Pay-as-you-go simply moves the cost into the months when payroll, and usually revenue, is actually there, instead of landing as one bill in a quarter when you also owe debt service.

It reduces surprises only for the payroll it sees, though. The audit can still move payroll into a higher-rated code, add officer payroll that your state counts differently, or charge for subcontractors who had no coverage of their own. See payroll estimates and surprise audit bills, class code corrections and the premium audit guide.

What does each payment plan really cost?

Pay-as-you-go is a billing method, not a discount. The rate, the mod and the payroll decide the premium. The costs to compare are the extras around it.

• Installment fees. Many carrier plans add a fee to each payment, set by the carrier's filed plan and the state. Get it in writing and multiply by the number of installments.
• Service fees. Some payroll providers or carriers charge for the pay-as-you-go connection. Others build it into their pricing. Ask both.
• Minimum premium. Workers' comp policies usually carry a minimum premium for the classes covered, set by the rating rules. If your payroll is very small, you may pay the minimum no matter how you are billed, so pay-as-you-go may not help much.
• Failed payment fees. Automatic debits that bounce can bring fees and, if not fixed, a cancellation notice. Keep the debit account funded around payroll dates.

For a sense of how the premium itself is built, see what drives workers' comp cost.

Can you move an inherited policy to pay-as-you-go?

It depends on the deal and the carrier. After a stock purchase the company keeps its policy. Ask the current carrier three things: whether it offers pay-as-you-go in each state where you have employees, whether your payroll provider connects with it, and whether it will change billing mid-term or only at renewal. Ask what happens to any deposit already paid: whether it is credited against future payroll payments or held until audit. After an asset purchase your new company binds its own policy, which is the natural moment to choose pay-as-you-go, as long as the policy and the payroll link are both live before your first payroll as owner.

The switch itself is where coverage gaps happen, especially when the seller used pay-as-you-go or a professional employer organization. The steps for lining up dates are in changing payroll providers without a workers' comp gap, and the ownership change report and mod are covered in the new owner review of workers' comp. Rules and rating bureaus vary by state, and in North Dakota, Ohio, Washington and Wyoming workers' comp comes only from the state fund. State fund policies there do not include employers liability, so ask your broker about stop gap coverage.

Is pay-as-you-go right for your business?

Coverage, price and carrier fit for your class matter more than the billing method. Pick the policy first, then ask what payment options come with it.

What should you ask your broker, carrier and payroll provider?

1. Does this carrier offer pay-as-you-go in each state where we have employees, and through which payroll providers?
2. Is there a deposit at the start, and is it refundable or applied at audit?
3. Which fees apply: installment fees, service fees, failed payment fees?
4. How is each employee mapped to a class code in the payroll system, and who checks it?
5. Will the carrier accept the payroll reports at audit, or still do a full audit?
6. How are officer and owner payroll, overtime and bonuses reported under our state's rules?
7. What happens to reporting if we change payroll providers or add an acquired company?
8. Who gets notices if a payment fails, and how long do we have to fix it?

A broker can collect these answers across carriers. If you want a second look at how the inherited policy is billed, a Morrow review can include it.

Keep reading

• Payroll Estimates and Surprise Workers' Comp Audit Bills
• Premium Financing for New Owners: When It Helps and When It Costs Too Much
• Changing Payroll Providers Without a Workers' Comp Gap
• New Owner Review: Workers' Compensation
• Workers' Comp Class Code Corrections: Fixing a Common Overpayment
• All guides for new business owners

Frequently asked questions

Does pay-as-you-go workers' comp mean no audit?

No. The insurer keeps its right to audit your records during the policy and for up to three years after it ends. Pay-as-you-go usually makes the audit adjustment smaller, but wrong class codes, uninsured subcontractors or payroll that was never reported can still produce a bill.

Can I switch an inherited policy to pay-as-you-go mid-term?

Sometimes, if the carrier allows a billing change mid-term. Many owners wait for renewal so the deposit, the audit period and the payroll link all start fresh on the same date.

Is pay-as-you-go more expensive than paying in full?

The premium is set by payroll, rates and your mod, so the base cost is usually the same. Check for service fees, and check whether the carrier gives any credit for paying in full that you would give up.

Does pay-as-you-go work in Ohio or Washington?

Not through private carriers. In North Dakota, Ohio, Washington and Wyoming, workers' comp comes from the state fund (or, in Ohio and Washington, approved self-insurance), which has its own billing options. State fund policies do not include employers liability, so ask about stop gap coverage.

What happens if a pay-as-you-go payment fails?

Terms vary by carrier and payroll provider. A failed debit can bring fees and, if not fixed, a cancellation notice. Keep the debit account funded around payroll dates and make sure notices go to someone on your team, not the seller.

References

• NCCI: Workers Compensation and Employers Liability Insurance Policy, WC 00 00 00 C (copy hosted by Guard)
• NCCI: ABCs of Experience Rating
• U.S. Department of Labor: State Workers' Compensation Officials directory

This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.