One of the options you might hear about when it comes to a workers’ compensation policy is a pay-as-you-go policy. You’re probably wondering what makes these different from other policies and whether they would be right for you or not. Generally, the policy itself is going to be the same as other types of workers’ comp policies. The major difference is how you pay for them.
When you opt for a “regular” workers’ compensation policy, the premium for the policy will be based on the payroll to be paid out during that policy term. When the policy is created, you let the insurance company know about the type of work your business does, your employees, and payroll amount for the term of the policy. The term will typically be for one year, but this can vary. Since you haven’t paid the payroll yet because it is in the future, the payroll amount is going to be an estimate or projection. The insurance company takes that information and then calculates what your annual premium will be.
Let’s look at an example. If you have an annual premium that would cost $10,000, you will find that carriers have a range of plans available for payment. One of those plans is called 10 Pay, which means you will put 10% down ($1,000 in this case), and you would then make nine monthly payments. Alternatively, they might have options for quarterly payments depending on the plan and the carrier.
Regardless, at the end of the term, you will have paid the $10,000 premium. Then, there will be a payroll audit to determine whether you paid more than you should have or less than you should have based on the actual payroll figures. If you didn’t pay enough, you will get billed for that extra amount at the end of the term.
Now, let’s look at the pay-as-you-go policies. In these cases, the annual payroll estimate is not important, and you don’t usually have to think about the annual premium. This is because you are paying monthly.
With these plans, the business will have to report the actual payroll that was paid to employees that month. When you provide this information to the insurance company, they will then calculate the premium and send you an invoice. This is a nice option, as it utilizes the true payroll, and tends to be more accurate than an estimate will be. After all, things can change during the year that will affect your payroll, such as needing to lay off some of your employees or hiring additional people.
This means that you don’t have to worry about surprise bills at the audit performed at the end of the policy term. Since you are essentially doing a self-audit each month, your payroll and premium will be accurate. There will still be an audit so the insurance company can review your payroll to double-check the numbers and make sure they are correct. However, there are far fewer surprises using this method.
While this might not be the ideal option for all companies, it can be a great option for smaller businesses and start-ups. With new businesses, there isn’t any historical data that can be used to come up with an estimate for payroll. Smaller companies might also not be making as much as they project. Using the pay-as-you-go method means you won’t be paying more than you should for your policy. It has the potential to help you save quite a bit of money, which can allow you to have more cash flow in the business.
Other companies that would benefit from this option would be seasonal businesses. If you have a company that makes a lot of money during two or three seasons, but less during the off-season, it makes sense to pay-as-you-go. This means that you wouldn’t be spending more than you should during those slow months. It is something you will want to consider, as you might end up spending a lot more on the policy than you should. This means that you wouldn’t be paying a premium based on the projections only to get refunded at the end of policy term but rather paying only based on actual payroll that was paid out to the employees during the off-season.
Of course, even though there are some nice benefits to the pay-as-you-go method, there are some drawbacks, too. One of the biggest is that it will require more work on your part, as you will have to calculate and provide the payroll to the insurance company each month. If you have the time, or if you have an employee who can handle that for you, it won’t be a problem. However, if you are doing it yourself or if it is an extra task for another employee, it can become frustrating to do this each month. If you forget to do it one month, it can lead to your insurance policy getting canceled for non-payment. If you think this might happen to your business, it might be better for you to consider the traditional payment structure.
Some companies prefer a “set it and forget it” option with the standard workers’ compensation policies. They have the money for the policy to be automatically paid each month, so they don’t have to worry about it and so they don’t forget anything. However, they do have to think about the potential for an added bill at the end of the policy if the payroll was not estimated to be high enough for the coverage.
Even with the drawback of the added time that it will take each month, many will find that this is a better option. Again, this type of policy will be particularly helpful for new businesses and seasonal businesses.
Now that you have a better understanding of the differences between paying for each of these types of policies, it’s time to determine what is best for you. Ultimately, it will depend on the size of your business and how much time and effort you want to put into calculating and providing the payroll numbers each month.
For those who have the time, opting for a pay-as-you-go policy will be a good choice. Those who want to have a simpler solution will choose a standard payment structure.
Regardless of which one you ultimately choose, you will want to make sure you are getting a high-quality policy from a reputable company that will provide you with the coverage you and your employees need.
Want to learn more about pay-as-you-go payment options for your business? Start an instant quote here so we can take a closer look at your business’s insurance needs and we’ll be happy to explain all the payment options available to you.