Workers’ compensation premiums can amount to a substantial proportion of many small- and medium-sized businesses’ staffing expenses, particularly those where injury risks are higher. The deceivingly straightforward formula for calculating premiums is:
Workers’ Comp Premium = Classification Code Rate x Payroll (per $100) x MOD
But the complexity within each factor means many businesses overpay on their premiums. An experienced Professional Employer Organization (PEO) knows how to navigate this complexity to lower your rates and save you money. To help you determine if you are overpaying and if a PEO is right for your business, we would like to shed some light on how the three factors are determined and some of the measures PEOs take to ensure the lowest possible rates.
Classification Code Rate
Classification Code Rates refer to the specific types of jobs based on the categories defined by the National Council on Compensation Insurance (NCCI). The rates associated with each category vary by state and business type and are higher for those jobs and industries that tend to be more hazard prone.
Each employee’s CCR is multiplied by every $100 of their earnings. This means employees with higher CCRs and higher salaries will produce substantially higher premiums.
The experience modification rate, or MOD, represents your company’s workers compensation claim history relative to the industry average. If your company has more claims than the industry average, your rate and, ultimately, your premium will increase.
PEOs have helped businesses lower their premiums by as much as 40%. Here are 3 ways how PEOs can help:
- Self-Funding – PEOs help shield your MOD rate from increases since they self-fund the first $1 million to $5 million of any workers’ compensation claim. This way your MOD rate stays low even if you submit claims.
- MOD and Verification – PEOs extend their MOD rate, which is usually very competitive, to the businesses they partner with. This is an added benefit to your premium calculation and is particularly cost saving if your business happens to have a high MOD rate. PEOs also will verify and correct discrepancies in your claims that could cause your rates to go up.
- Economies of Scale – PEOs have access to large, nationwide insurers and can negotiate rates that are up to 40% lower than what small- and medium-sized businesses can obtain. PEOs can also provide monthly pay-as-you-go coverage so you are not stuck with a huge premium bill at the end of the year.
With a PEO, you won’t have to worry about searching for the lowest rates or the latest state regulations to keep you compliant. If you are ready to take advantage of these benefits to get lower premiums, contact PEO Consultants today, and we will help connect you with the PEO that is right for your business.