Discuss the concept of experience rating using examples from unemployment insurance, homework help

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Business Finance

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  1. Discuss the concept of experience rating using examples from unemployment insurance. Would the same concept apply to workers’ compensation? How does experience rating play a role in insurance coverage?

Experience rating is a method of rating in which premiums are adjusted up or down to reflect previous loss experience. It is based on the assumption that future losses are likely to be similar to those encountered in the past (Bonner, 2016). Experience rating plans compare businesses in the same industry group. The information gathered from these ratings can also be useful in the development of employee compensation package, which you as an employer are required to carry. The worker's comp insurance program is meant to cover employees in case they are injured on the job. Every state except for Texas requires employers to carry workers compensation insurance (Shelton, Marsan, Patterson, Waring, & Hayat, 2017, ). Generally, workers compensation insurance costs are based on industry. The riskier the job, the higher the rate; for example, the rate for a construction worker is about $18.62 per every $100 in wages vs. someone who works in an office, whose rates are closer to .15 cents per $100 in wages. Like experience ratings, the worker's comp insurance rates also vary by state. Unfortunately, the experience rating is generally only available after a specified period (such as 3 years). Experience ratings are typically used in the development of a worker's compensation insurance package.

As an employer, you are also responsible for the funding of unemployment insurance at both the federal and state level. Although, the state is responsible for setting its unemployment tax rates for individual organizations. These rates are generally based on the number of employees that you have fired and how many of those employees make unemployment claims. Since former employees may be entitled to unemployment benefits, depending on the circumstances under which they quit or were terminated, it's important to follow upon unjustified unemployment claims because successful unemployment benefit claims can and often do affect your tax rate.

Additional reasons why you should follow up your ex-workers collecting unemployment:

  • You want to keep your tax rates as low as possible since the number of ex-employees who receive unemployment after leaving your business affects your state unemployment tax rate
  • These actions may discourage a lawsuit if there's a chance that the worker is going to sue for discrimination or wrongful discharge (BizFilings, 2016)
  • As a preventative to double dipping, since an injured worker may be eligible to draw permanent partial disability benefits and unemployment benefits at the same time ( Des Moines IA Lawyer, 2017). This is only legal if the injured worker is released to return to work, with or without, permanent restrictions. If the worker has been released to return to work and his or her employer does not have a job for him or her, the worker may apply for unemployment benefits ( Des Moines IA Lawyer, 2017). If the proper follow up is not conducted company funds may be jeopardized.

References:

BizFilings, (2016,May 02). The Unemployment Benefits System: How it Works and When to Contest a Claim. Retrieved from https://www.bizfilings.com/toolkit/research-topics...

Bonner, M. (2016, May 06). How Experience Rating Affects Your Premium. Retrieved from https://www.thebalance.com/what-is-experience-rati...

Des Moines IA Lawyer. (2017). Unemployment-vs-Workers-Compensation. Retrieved from http://www.wdmlawyer.com/Workers-Compensation-Clai...

Shelton, C., Marsan, J., Patterson, B., Waring, D., & Hayat, H. (2017, June 26). 2017 FICA Taxes, Unemployment Insurance, & Workers Comp For Owners. Retrieved from http://fitsmallbusiness.com/fica-taxes-unemploymen...

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Experience Rating
Experience rating is a way of examining the past risks ad projecting for the future...


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