In most states, workers’ compensation insurance is required by law. This type of coverage protects your employees from the lost wages and medical costs of job-related accidents or illnesses, and protects your business from legal fees if an employee or their family sues as a result of a workplace injury or illness.
There are two primary payment terms for workers’ compensation insurance policies, conventional and pay-as-you-go. A conventional payment plan calculates the annual premium based on estimated payroll expenses. There is typically a down payment, and the balance is then paid by equal monthly or quarterly installments. Pay-as-you-go calculates premiums based on actual payroll expenses and is paid each pay period.
If COVID-19 has impacted your payroll, switching your traditional workers’ compensation policy to a pay-as-you-go program as an alternative payment option could provide cash flow relief at a time when it’s never been more needed.
How Pay-As-You-Go Affects Cashflow
Conventional workers’ compensation plans are based on estimated payroll amounts for the upcoming policy year. For many employers, their current payroll is significantly lower than they had expected at the beginning of the policy year due to COVID-19 and subsequent salary reductions, furloughs, and layoffs. For that reason, it might make sense to update your policy and take advantage of the benefits of a pay-as-you-go plan.
- Get a refund of your current policy. If you change your current policy and move to a pay-as-you-go plan, you will receive a refund of your remaining premiums and any overpayments year-to-date. That will provide some additional cash for your business.
- Pay just the right amount each pay period. Moving from a traditional payment plan to a pay-as-you-go plan means you will pay your premiums each pay period, and you won’t be required to pay an up-front lump sum. Additionally, because pay-as-you-go is based on actual payroll expenses, your costs are reduced when your payroll expenses go down.
- Avoid surprise payments. Because traditional workers’ compensation plans are based on payroll estimates, they are often inaccurate. Pay-as-you-go ensures each payment is precisely what is owed for each payroll, thus eliminating the risk of underpaying the premium and owing a large sum at the end of the policy term.
A pay-as-you-go policy can provide a higher level of control over workers’ compensation insurance expenses for many employers. At a time when businesses could use all the help they can get, moving from a conventional payment plan to a pay-as-you-go plan might provide thousands of dollars that can be used now.
For more information on workers’ compensation insurance and pay-as-you-go options, we recommend that you contact your insurance broker or payroll provider.