A growing number of companies are forgoing conventional workers' compensation coverage in exchange for a pay-as-you-go plan. This flexible model used to be the exclusive territory of carriers in the low-risk categories like administrative personnel and inside sales, but no more. The trend is picking up speed as companies in every sector take note of the distinct advantages these premium payment plans offer.
But wise professionals don't choose insurance coverage strategies based just on trends. Other factors play a role as well. Let's explore how these plans work and why they've recently become so popular.
The ABCs of Workers' Compensation Coverage
It helps to first understand how conventional workers' compensation insurance works in order to understand the pros and cons of pay-as-you-go. Standard coverage typically requires that a business owner make an upfront deposit based on an estimation of annual gross wages. The company submits quarterly data to the insurer, who calculates the bills and collects its fees.
Because the whole system runs on estimates, an end-of-year audit is required to reconcile all the estimates with reality. If the deposit and quarterly payments don't cover the final total, the company must make up the difference with a lump sum. Conversely, if the payments and deposit went further than expected, the overpaid balance simply rolls into next year's account.
How Does Pay-As-You-Go Coverage Work?
It's no wonder that today's leaner, cash-conscious businesses are increasingly opting for pay-as-you-go coverage. In contrast to the older model's lump sums and annual finger-crossing, pay-as-you-go requires no initial deposit and no audit anxiety. That frees up energy and capital for other things. In lieu of estimates and quarterly bills, a company can submit data from each payroll to be debited for actual wages. This accurate, real-time system keeps surprises to a minimum.
The streamlined process requires much less manpower to execute-which also translates into savings. Automated payments can be funneled simply into any number of useful data reports. The system includes a built-in transparency protection; it's easy to cross-reference payroll reports with insurance premiums to verify their accuracy.
There are two ways to handle debits. Either the payroll company submits information to the insurance carrier, who debits the account, or the payroll company deducts the insurance premiums alongside the deductions for taxes, direct deposits, and the like.
On either path, pay-as-you-go plans leave more cash in the coffers for day-to-day business operations and eliminate the unpredictability of conventional plans-advantages that are most important in small businesses that really feel the crunch in these areas. Businesses whose payrolls fluctuate throughout the year are also prime candidates to benefit from switching to a pay-as-you-go model, which can better accommodate seasonal ups and downs. But even large companies appreciate the smart manipulation of cash flow-especially in uncertain economic times.
Pay-as-you-go arrangements are only permitted for companies that outsource payroll rather than handle it internally, and the payroll firm must be bonded and insured and have an agreement in place with the insurance carrier.
There's little downside associated with the pay-as-you-go workers' compensation model, although it's wise to plan carefully. Changing providers mid-stream, for example, can cost you, because your account will probably revert to the conventional installment-based system until your policy renews. Ask your broker so you know upfront how the transition will work.
Should You Keep Traditions Alive?
Truth be told, the benefits of traditional coverage are primarily reserved for the carriers themselves, who collect the deposits upfront and continue to come out ahead. For everyone else, the technology that has brought pay-as-you-go premiums into vogue deserves a round of applause. This newly popular form of workers' compensation insurance is a valuable tool in keeping companies quick and lean.
The Future of Workers' Compensation
The real-time data required for pay-as-you-go was tougher to come by when paper trails ran the show. Now that virtually every business transaction is computerized, making use of up-to-the-minute numbers is a snap.
There seems to be nothing but praise for this trend, so why have so few business owners heard about these packages before? Most people don't know pay-as-you-go is an option because there's been no reason for the carriers to publicize it. The payroll and human resources firms that frequently manage these processes are not always champions of communicating industry trends to their clients. But as more companies successfully adopt the practice, the good news continues to catch on with new customers.
The carriers who don't yet offer these payment plans will soon be required to do so based simply on market demand. With all the advantages of pay-as-you-go, it's inevitable that this option will gradually replace conventional premium payment models as the norm.
Ask your payroll and human resources firm or insurance carrier for more details on how pay-as-you-go workers' compensation premiums can work for you.