Pay-As-You-Go Workers’ Comp: Navigating Your Options and Avoiding Common Pitfalls
Pay-as-you go workers’ comp is becoming more and more popular with small business owners. Here’s what you need to know before jumping in.
What is pay-as-you-go workers’ comp?
Pay as you go workers' comp is a workers’ comp policy that allows you to pay your premium based on your actual payroll figures, not an estimate. It’s not a different type of insurance, it’s just another way of paying your premiums.
How does pay-as-you-go workers' comp work?
With pay-as-you-go, you pay your insurance premiums each pay cycle after you calculate payroll figures for that pay period or monthly after calculating that months total payroll figures.
What’s the difference between pay-as-you-go workers' comp and a standard plan?
Standard workers’ comp:
A standard workers’ comp policy works with projected payroll. You estimate what your payroll will be for the year, and then enter into a payment plan with your insurance company where you pay a specific rate per $100 of projected payroll.
Typically, you would pay an upfront payment of 25% of your premium and then the rest in 9 or 10 installments. At the end of the policy term (usually the end of the year), the insurance company audits your policy. If your payroll was lower than you estimated, then you overpaid and they will pay you back. If your payroll was higher than you estimated, then you underpaid and you will owe them money.
Pay as you go:
A pay-as-you go policy works with actual payroll, not projected payroll. You pay a small upfront payment, typically 10% or less of the premium, and then you pay the rest of the premium as you pay your payroll.
The insurance company will also audit pay-as-you-go policies at the end of the policy term, but the audit is usually to check classification accuracy and that all the contractors were insured, not only to reconcile payment discrepancies. This audit will ensure that accurate payroll figures were being reported during the policy term
What are the advantages of a pay-as-you-go workers' comp policy?
There are many reasons why small businesses choose the pay-as-you-go method of paying their workers' comp insurance premiums.
Small or no up-front payments
In pay-as-you-go, the up-front payment is usually reduced to 10% of your premium, instead of the 25% you would pay in a standard policy. Sometimes, the carrier will even get rid of the down payment completely.
The payments are also smaller and spread over the course of the year instead of 9 or 10 larger payments. This can markedly improve your cash flow.
More accurate payments
You pay exactly what you owe; nothing more and nothing less. With standard or “regular” workers' comp, you project your payroll and then “even it out” at audit. Pay-as-you-go takes the guesswork out of your payments.
No surprise bills at audit
Although pay-as-you-go does not eliminate the audit completely, it does simplify the audit process. The preparation is less of a hassle, as your payroll audits are up to date. You also eliminate any surprise bills at audit, as you’ve essentially been “self-reporting” all these months!
Which businesses benefit the most from pay-as-you-go workers' comp?
Certain businesses gain tremendously from pay-as-you-go policies - For example:
Startups
Startup businesses are often strapped for cash - and for them, cash flow means a lot. Avoiding the large upfront payment of a standard workers' comp policy can make a huge difference.
Seasonal businesses
Businesses like contractors, landscapers, and some hotels have busy and dry seasons with fluctuating payrolls. Some only work part of the year. Pay-as-you-go allows such businesses to pay workers' comp premiums only during the months that they are working.
Fast-growing businesses
Businesses that are experiencing tremendous growth may have a hard time projecting their payroll for the entire year. For such businesses, pay-as-you-go makes sense.
What are the downsides of a pay-as-you-go workers' comp policy?
The main disadvantage of pay-as-you-go is the hassle of analyzing and reporting your payroll to the insurance company every payroll period.
Keep in mind that workers' comp premiums are calculated based on industry and payroll size and vary from business to business. A company with a large workers’ comp policy may be willing to report payroll each month to avoid a large upfront payment. For a company with a small policy, it just may not be worth the hassle.
Note: Monopolistic states, or states that offer only state-funded workers' comp policies, do not offer pay-as-you-go as an option. Also, not all independent carriers offer it. Ask your agent about your options.
Questions to ask yourself before choosing pay-as-you-go:
- Do I need this?
• Will my business benefit from the cash-flow advantages of a smaller up-front payment and smaller payments over the course of the year?
• Is my business seasonal or does my payroll fluctuate, making it hard to project payroll? - Can I do this?
• Are we already using pay period or another payroll system that we can easily share with our carrier?
• Do I have an office staff that can easily analyze and report payroll? - Is it worth it?
• Is my premium large enough to be worth the hassle of self-reporting each pay-period?
What are my pay-as-you-go options?
Once you choose pay-as-you-g as your payment plan, you’ll need to decide how to report payroll each month. You have several options, which are listed below.
Self-reporting
If you choose to self-report, you’d share your QuickBooks or payroll report with your insurance company each month. This option doesn’t carry any added or hidden fees, an-as-you-go can be a good option for a company that is set up to properly self-report.
When to stay away from this option:
If you don’t have an office staff in place, or if you’re a one-man show that struggles with paperwork and getting bills in on time, pay-as-you-go is probably not a good fit for your business!
If you miss a report, or if you are late, you run the risk of a lapse in coverage or having your policy canceled.
PEO integration
If you decide to get workers' comp insurance with a PEO (professional employer organization), either because you are a new business or because you are in a high-risk industry, your PEO can do your reporting for you.
This makes sense since they are already withholding your taxes and calculating premiums. Also, PEO’s are in the business of selling insurance, so you can rest assured that they understand your insurance needs and will get you comprehensive coverage.
When to stay away from this option:
If you don’t need a PEO in order to get workers’ comp, don’t use one just to get the payroll reporting benefits.
Be aware that when a PEO gives you a quote for a pay-as-you-go policy, they are also selling you a whole slew of services like admin, payroll, and benefits. You’ll do better by buying a stand-alone pay-as-you-go policy from an agent without all those added services.
Payroll company integration
Many payroll companies will offer to “throw-in” workers' comp pay-as-you-go since they are doing payroll - which is so intimately intertwined with workers' comp.
They will offer you a pay-as-you-go policy and tell you that they will do your “monthly maintenance” for you. It seems tempting, since payroll reporting can be a nuisance, and they are doing your payroll anyway for you.
This option is almost never to your benefit!
When to stay away from this option:
If you accept their offer, the payroll company will become your agent on record - and they are not in the business of selling insurance. It’s like having your roofer “throw in” your electrical wiring! For them it’s a side hustle that will bring in extra revenue, but it is not in your best interest.
Workers’ comp is extremely nuanced and you want an experienced workers’ comp professional on your side to get you the best coverage. Payroll companies are “payroll nerds” but you need an “insurance geek”.
Independent Reporting Company
There are independent reporting companies that will take care of the reporting for you to your insurance company for a small monthly fee. They will get “view only” access to your payroll, analyze it, and send the reports to your insurance company.
As a fringe benefit, they will make sure your class codes are correct and analyze your audits to see if there were any mistakes made not in your favor.
They basically will integrate your payroll with your carrier. They do not sell insurance, they are only there to take care of the monthly reports and allow you to use pay.
With this option, you get the benefits of pay-as-you-go without the drawbacks, for a minimal monthly fee. It’s an option we highly recommend.
In fact, there are some insurance companies that will only allow pay-as-you-go if you use an independent reporting company. This guarantees the insurance company that the reporting will be timely and accurate.
When to stay away from this option:
This is a great option for almost anyone. The only downside is a monthly fee, which is minimal.
Here’s how one independent reporting company describes themselves:
“Hooks right into your current payroll and insurance setup. We work with your Insurance Carrier, Agent/Broker, and Payroll Provider. We’re not an alternative, we’re an integration.”
- Reliable Premium Management Inc.
Still not sure which route to take?
Here at Kickstand, our expert insurance advisors will review your options and help you decide if pay-as-you-go is a good fit for your business. We will consider your business type, payroll size, and clerical capacity, and then help you choose an option that is good for you. Call us at 866-338-6388 or fill out an instant quote.
Note: The information provided in this blog is intended for general informational purposes only and is not a substitute for professional legal or insurance advice. Laws and regulations regarding workers' compensation insurance are complex and vary by state and by specific circumstances. Therefore, readers are encouraged to consult with a qualified legal or insurance professional to obtain advice with respect to any particular issue or problem they might have.
Mordechai Kamenetsky, co-founder and lead agent of Kickstand, is recognized as an expert in workers' compensation. He is passionate about helping small businesses manage risks and lower their workers' comp costs. In his articles, he educates readers and clients on the intricacies of workers' comp insurance.
