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Understanding Workers’ Compensation Insurance Premiums and Codes

Paying attention to job-classification codes may save you hundreds of thousands in workers’ comp premiums. With different categories and sub-categories, and multiple codes for similar positions, if you don’t audit your workers compensation insurance codes regularly, you could be overpaying.

Understanding Workers Compensation Insurance

Workers’ compensation insurance premiums are a sizeable expense.  In fact, it may be one of the higher-cost line items for a company. Depending on the size of the company, insurance premiums for workers’ comp may range from $30,000 a year to well over $1 million.

Although there are a myriad of considerations that factor into the total premium that an employer ends up paying, workers’ compensation premiums are calculated based on a rather simple formula: Base Rate (x) Experience Modifier (x) Payroll (+/-) Adjustments = Premium.

However, with over 700 company classification codes and many more employee classification codes, this simple formula becomes more complex.  Employee classification codes and rate modification designations are often hard to understand, and the assignment of a wrong code to a company may be costly.

Example:  A plastic injection molder with 200 employees may have many different classification codes, each with different risk points.

  • An employee involved in the production of plastic sheets, rods or tubes may be classified as 4452.
  • Employees involved in the compression or injection of plastics may be classified as 4475
  • Employees in plastic assembly would be classified as 4476.

Why Does Proper Classification matter?

The insurance carriers that provide workers’ comp insurance use the codes to track losses. Their data may suggest that employees working under code 4452 are more likely to get hurt on the job than code 4476.  Therefore, the estimated amount of workers’ comp claims for 4452 would be higher.

To offset the higher risk of code 4452, the workers’ comp premium is calculated at $7.45 per $100.00 of payroll. The lower risk code 4476 is only $6.05 per $100.00 of payroll. The code for a clerical worker at that same company is 8742 or 43 cents per $100.00 of payroll.

If an employee is misclassified, however, the rate differential is significant and you may end up overpaying. Let’s say you’re a New York employer, have 75 employees, each one making $35,000 per year under the classification code 4452. The annual payroll for that group is thus $2,625,000. The workers’ comp premium would be $195,562 per year.

You know that 35 of those employees are really assemblers and therefore should be in the classification code 4476. Your revised premium would be $177,187, or a savings of $18,375. That is a significant difference, and the difference is compounded yearly. If errors are found, the law provides a three-year look back, resulting in a refund in excess of $50,000.

Ensure Proper Classification in Workers Compensation Insurance, Save Money

First, find the proper classification codes at the National Council on Compensation Insurance website or the relevant state workers’ comp rating bureaus.

You should start with a general understanding of the classifications. You can find the codes pertaining to your company on your current policy.  Pay attention to the rate change dates, as new ratings are generated from the state rating bureaus several times a year.

Once you understand the classifications, you can begin to dig into the policy.  A spreadsheet with a list of employees and corresponding codes will help organize information properly.

Remember to look at the multiple sub-classifications:  All machine operators are not coded the same, for instance. The rates may be significantly different.  A machinist on the floor of the factory full time is different from a machine operator working at a control center away from the factory floor.

Now that your worksheet is complete, you should prepare a letter to the insurance carrier indicating the errors.  Most frequently, carriers will make the adjustments, resulting in lower premiums.  If they deny the changes and you still feel strongly, you can appeal to the state workers’ comp-rating bureau.

Nova Medical Centers hopes that this insight helps you to save money in Workers’ Compensation Insurance, and hopes that this allows you to put money back into the employees.  As a provider of occupational health services to businesses throughout Texas, Tennessee, and Georgia; we help businesses make the most of their human resources investment.  Contact us today to learn more about the Nova Difference.

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