Paperless Insurance employees and staff extend our deepest sympathy to our friends and neighbors in the Los Angeles area affected by the devastating wildfires. To help policyholders obtain the support and assistance they need to navigate the challenges ahead we will post a few articles with answers to some frequently asked questions. Today we will review what to do if the employer’s payroll records were destroyed and are no longer available for the payroll audit?
Payroll audits are a crucial part of workers’ compensation insurance, ensuring that businesses pay the correct premium based on their actual payroll. But what happens if an employer’s payroll records are destroyed due to an accident, fire, or other unforeseen circumstances? Losing these records can be stressful, but taking the right steps can help employers avoid penalties and ensure the audit process runs as smoothly as possible.
Proactively Communicate with Your Auditor
The first and most important step if payroll records are lost is to immediately notify your insurance company’s auditor. Being upfront about the situation demonstrates cooperation and may prevent unnecessary penalties. Insurance auditors expect access to payroll records to complete their review, and failing to provide them without explanation could lead to classification as an “uncooperative employer.” This can result in penalties or a significant increase in the billed premium.
By informing the auditor as soon as possible, employers can work together with the insurer to find alternative solutions for verifying payroll information.
Reconstructing Payroll Records
If payroll records have been destroyed, employers should explore ways to reconstruct the lost data. Some possible sources of payroll information include:
- Bank Statements – Payroll deposits can provide insight into total compensation paid.
- Tax Filings – IRS forms such as 941s (quarterly payroll tax returns) can help confirm payroll figures.
- Third-Party Payroll Providers – If a business uses an external payroll company, they may still have copies of payroll records.
- Employee Pay Stubs – Individual paycheck records can serve as supporting documentation.
- State Unemployment Reports – These can also verify wage data for employees.
The goal is to provide auditors with as much verifiable information as possible to ensure a fair audit outcome.
Understanding Audit Codes for Lost Records
If an employer’s final policy premium exceeds the physical audit threshold, but the payroll records are unavailable, insurers must report the situation using specific audit codes on the Unit Statistical Report (USR). These codes indicate the reason payroll records were not used in the audit.
- Estimated Audit Code “Y” – This code is used when payroll records were lost due to circumstances beyond the employer’s control, such as a natural disaster or fire. The insurance company must also submit a statement explaining why the audited exposure figures could not be obtained.
- Estimated Audit Code “U” – If an employer fails to provide payroll records without a valid reason and is deemed uncooperative, the insurer will assign this code. Being categorized as uncooperative can lead to higher premiums and possible penalties.
Employers should strive to avoid the “U” code by being transparent and making a good-faith effort to work with the auditor.
Preventative Measures for the Future
To avoid complications in future audits, employers should take steps to secure payroll records and maintain backups. Here are some best practices:
- Digitize Payroll Records – Store payroll records electronically using cloud-based payroll software or digital accounting systems.
- Keep Offsite Backups – Maintain copies of payroll records in a separate, secure location to prevent loss from disasters.
- Work with a Payroll Provider – Third-party payroll services often keep backups, reducing the risk of permanent record loss.
- Regularly Audit Internal Records – Periodically reviewing payroll records can help ensure all necessary documents are available and accurate.
Final Thoughts
Losing payroll records can create significant challenges during an insurance audit, but employers who act proactively can minimize the impact. By communicating with auditors, attempting to reconstruct records, and implementing preventative measures, businesses can avoid penalties and ensure compliance with audit requirements.
If your business has experienced a payroll record loss, reach out to your insurance provider immediately to discuss your options and work toward a resolution. Taking action now can save time, money, and unnecessary stress in the future.