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Workers’ compensation insurance requirements vary from state to state, but most employers are required to offer it in some shape or form. Even if your state doesn’t mandate workers’ comp coverage, having it can provide important protection – and peace of mind – for both you and your employees if someone gets hurt or sick on the job.
Traditional workers’ comp plans usually require an upfront deposit and can be a hassle to update as employees join or leave your company. It’s one of the reasons why more flexible pay-as-you-go workers’ comp policies are becoming popular. Let’s dive into the differences between these two types of plans and how pay-as-you-go insurance can help your business in the long run.
Traditional workers’ comp plans explained
First things first: Workers’ comp is employer-paid insurance to cover medical claims or lost wages owed to an employee who misses time due to an illness or work-related injury. Traditional policies usually require employers to make an upfront, lump-sum deposit at the beginning of each year, which can be a big hit to the cash flow of a small business. Also, policy costs are based on an estimate of what a company’s premiums will be based on the company size and nature of each employee’s job. For example:
- Costs can be higher for employees who are more likely to be injured, like construction or manufacturing workers
- Costs tend to be lower for employees in roles with less risk, like clerical or office workers
These factors generally stay the same, but if your employee count changes over the course of the year — which affects your wages and your premium — you’re responsible for communicating the information to your broker so they can issue an endorsement (or a change) on your policy.
With a pay-as-you-go policy, premiums are predictable since they are based on your regular payroll and automatically updated, no matter how many employees stay or go. That’s one of the big differences between traditional worker’s comp for small businesses and pay-as-you-go.
What is pay-as-you-go workers’ comp?
Pay-as-you-go plans are calculated based on actual wage data from each pay period. So, as you add and remove workers, premiums automatically adjust from pay run to pay run. Typically, with pay-as-you-go there is no upfront deposit to get a plan started. So, it might be something to keep in mind for companies concerned about cash flow. Also, there is no need to update your policy as employees join or leave your company — and since these plans are not based on an estimate — there’s much less of a chance for an end-of-year audit.
Best of all, there’s no up-front premium. You pay as you go, which means you don’t have to cover the whole year in a single lump sum, like traditional workers’ comp payments.
Unless you’re in one of the four states that require businesses to purchase workers’ compensation from state agencies (North Dakota, Ohio, Washington, and Wyoming), there’s a good chance your business will qualify for a pay-as-you-go policy. It’s worth calling your workers’ comp or payroll provider to see if your business qualifies and if the switch can save you some money.
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Benefits of a pay-as-you-go workers’ compensation policy
There are various reasons business owners should consider pay-as-you-go workers’ compensation insurance. Here are the most common ones we hear:
Improve cash flow: Rather than paying one lump sum upfront to get your policy underway or waiting for money back at the end of the year, your payments are spread out month-to-month. It can help improve both your budgeting and cash flow
Automation and convenience: Pay-as-you-go plans can be easier for employers to manage. Instead of paying a separate invoice for insurance annually, the premium is automatically deducted during each payroll, leaving you more time to focus on your business.
Avoid unexpected expenses and reduce risk: Since traditional plans are based on an estimate, the amount you pay to get your policy setup may not cover all your costs, and you could have a surprise expense at year’s end. It can happen when businesses are in growth mode because when new people come on board, it increases the cost of insurance. In some cases, you might get a refund if payments were estimated for more employees than you have at the end of the term. But, because pay-as-you-go is automated with each pay run, premiums adjust accordingly, and you don’t have to worry about any surprises cropping up at the end of the year.
Higher visibility into insurance costs: With each pay run, you can access reports that show gross wages, exempt wages, and premium costs for each employee. It helps you get a better picture of what you’re paying for workers’ comp insurance.
Quality coverage and carriers: The largest and highest-rated carriers offer pay-as-you-go policies with the same coverage quality as traditional policies. If you’re looking for a new carrier, be sure you confirm that they have an integration with your payroll software or payroll provider.
Is pay-as-you-go a good option?
Many small businesses simply don’t know that pay-as-you-go workers’ comp is available to them. If you’re a business owner with your eye on the bottom line, switching to pay-as-you-go could be worth a closer look. If your payroll service is compatible, switching can be super easy, so try talking to your payroll provider or your insurance broker to see whether it can also help you can save headaches, time, and money.