Audit Noncompliance Charge: How It’s Calculated, Applied, and Reversed

An audit noncompliance charge is a penalty your workers’ compensation insurer adds to your account when you refuse to cooperate with the mandatory year-end payroll audit. Under the standard NCCI rule, it can reach up to two times your estimated annual premium, and a handful of states allow even more. The charge sits on top of your regular premium, so a $100,000 policy can generate a total bill of $300,000. The important thing to know up front: cooperating with the audit after the fact gets the charge removed, but paying it without turning over records does not.

What Triggers the Charge

Every workers’ compensation policy requires you to let the insurer examine and audit your records. When you ignore audit requests or block the auditor from reviewing your payroll data, the insurer treats you as noncompliant with the policy’s terms and can apply an Audit Noncompliance Charge, usually shortened to ANC.¹

The charge is not triggered by reporting payroll that turned out to be too low, or by misclassifying a job. Those get corrected through the normal audit adjustment. The ANC exists for the narrower situation where the insurer cannot verify anything at all because you will not produce records or grant access.

Before the carrier can apply the charge, it must make at least two documented attempts to obtain the audit information from you. Each attempt has to spell out which records are needed and the dollar amount of the ANC that will be applied if you continue to refuse.¹ The Audit Noncompliance Charge Endorsement is also attached to your policy at inception, so the possibility is disclosed from day one. If both outreach attempts fail and you still have not cooperated, the charge lands on your account.

How the Amount Is Calculated

The ANC formula starts with your estimated annual premium — the figure set at the beginning of the policy term based on projected payroll and job classifications. The insurer then multiplies that figure by an ANC multiplier. Under the standard NCCI rule, the multiplier can be up to two times the estimated annual premium.¹ “Up to” matters. The carrier applies underwriting judgment when setting the multiplier, so the penalty can be less than the maximum, but the ceiling in most states is twice the estimated premium.

In practice, if your estimated annual premium is $100,000, the ANC can reach $200,000. That amount is added on top of the original premium, bringing the total due to $300,000.² The ANC is treated as premium for billing purposes but is not part of your standard premium.

This calculation applies regardless of whether your actual payroll during the year was higher or lower than the estimate. That is the point: the insurer has no way to determine your real exposure because you withheld the records, so the penalty stands in for that unknown risk.

State Variations

Not every state uses the standard two-times multiplier:

Missouri sets the ANC equal to the estimated annual premium, effectively a 1x multiplier.
Florida (assigned risk only), South Carolina, North Carolina, and Georgia allow the multiplier or payroll inflation factor to reach up to three times.
Colorado and Montana require the carrier to file its proposed ANC amount with the state department of insurance for approval rather than applying a preset multiplier.

The same noncompliance on the same payroll can produce very different penalties depending on where the business operates.²

What Else It Costs You

The dollar figure is only part of the exposure. Refusing to cooperate with the audit creates knock-on consequences that can make it hard to keep coverage at all.

Policy Cancellation

The standard endorsement warns that failure to cooperate with the audit provision may result in cancellation of your coverage. Cancellation notice periods vary by state. Losing workers’ comp coverage exposes your business to serious legal and financial liability, since most states require employers to carry it and operating without it can trigger fines, stop-work orders, or personal liability for workplace injuries.

Assigned Risk Lockout

If your business cannot find coverage on the voluntary market and relies on a state-approved assigned risk plan, audit noncompliance creates a bigger problem. An employer with an applied ANC is considered noncompliant and stays ineligible for assigned risk coverage until the audit is actually completed and the required records are provided. This applies even if you have paid the full ANC. Writing a check for the penalty does not fix it; the insurer needs the records.¹

Experience Modification Rate

One piece of good news. The ANC itself does not feed into your experience modification rate. The charge is excluded from experience rating and from ratemaking calculations entirely.¹ The ANC hits your wallet, but it will not directly inflate the modifier future carriers use to price your premiums. A history of cancellations and audit noncompliance still signals to underwriters that the account is a problem, which can narrow your options in the voluntary market.

Records the Auditor Needs

Whether you are trying to prevent an ANC or get one reversed, the fix is the same: give the auditor what they need. The documents fall into a few categories.

For payroll verification, you will need your federal quarterly or annual tax returns. Form 941 reports wages paid and taxes withheld each quarter.³ Smaller employers whose annual tax liability is $1,000 or less file Form 944 instead, which covers the full year in a single return.⁴ Form 940, the federal unemployment tax return, is also commonly requested to cross-check payroll totals. Beyond the tax forms, auditors need individual earnings records for each employee showing regular pay, overtime, and bonuses broken out separately.

If your business uses subcontractors, have their certificates of workers’ compensation insurance ready. When you cannot produce a valid certificate for a subcontractor, the auditor will treat that person’s labor costs as your uninsured payroll and charge premium on it. That is one of the most common sources of surprise additional premium at audit time, whether or not an ANC is involved.

Most of this documentation can be exported from payroll software or pulled together by your accountant. Organize files to match the categories on the insurer’s audit worksheet: payroll summaries with overtime separated by employee, descriptions of work performed by each person, and their employment dates during the policy period.

Getting the Charge Reversed

An ANC is not permanent. If you cooperate with the audit after the charge is applied, the insurer must remove it and recalculate your premium based on your actual payroll.¹

Start by contacting the carrier’s audit department directly or through your insurance agent. Submit the payroll records and any other documentation originally requested. Most insurers accept electronic submissions through a secure portal, though certified mail works when you need a paper trail. Once the carrier has everything, they will perform the audit and issue a revised premium statement reflecting your real payroll exposure. The ANC line item comes off.

If you already paid the ANC before cooperating, the carrier must either refund it or apply it as a credit toward any outstanding balance on the policy.¹ Which one happens depends on whether anything else is owed. If the final audited premium comes in lower than the estimated premium, you can end up getting money back on both the ANC and the premium overpayment. If it comes in higher, the refunded ANC offsets the additional premium first.

Disputing the Charge

If you believe the ANC was applied unfairly, or you did cooperate and the carrier failed to credit your records, there is a formal path to challenge it. The first step is always direct negotiation with the carrier. Gather your documentation, put your position in writing, and keep copies of everything.

If direct negotiation fails, policyholders in NCCI states can use NCCI’s Dispute Resolution Process. Before submitting a request, you need to:⁵

Pay all undisputed premium. You cannot use the process while sitting on premium you acknowledge you owe.
Calculate the disputed amount, providing a written estimate of the premium you believe is wrong along with your own calculation of what you think you owe.
Document your attempts to resolve the issue with the carrier and describe what happened.

The written dispute request goes to NCCI’s Dispute Resolution Services and must be sent simultaneously to all other parties, typically the carrier. NCCI assigns a dispute consultant who reviews the matter with both sides. If the consultant cannot broker a resolution, the matter can be escalated to a Workers’ Compensation Appeals Board, which hears both sides and issues a written decision.⁵

You can also file a complaint with your state’s department of insurance if you believe the carrier violated notice requirements or applied the charge without making the required two documented contact attempts. State insurance regulators have authority over carrier conduct and can intervene when insurers skip procedural steps.

1
National Council on Compensation Insurance. B-1429 – Establishment of Audit Noncompliance Charge
2
NCCI. Unit Reporting State Programs and Exceptions
3
Internal Revenue Service. About Form 941, Employer’s Quarterly Federal Tax Return
4
Internal Revenue Service. About Form 944, Employer’s Annual Federal Tax Return
5
NCCI. Dispute Resolution Process