Date: January 2023
Employers in Minnesota are required to purchase workers’ compensation coverage. The purpose of workers’ compensation coverage is to ensure that benefits are available to employees who sustain a work-related injury or illness. Unique to setting the cost of coverage is the employer’s experience modification factor, or mod factor.
Every MCIT member that has an annual workers’ compensation contribution more than $5,000 has an experience modification factor. The mod factor takes into consideration the amount of payroll in each of the member’s class codes and the member’s claims experience. The higher the mod factor, the more a member pays for workers’ compensation coverage.
Workers’ Compensation Contribution Calculation Process
MCIT’s workers’ compensation contribution calculation process begins every March with a request to members for their estimated payroll by class code for the next year. Once gathered and reviewed, class codes, payroll and loss information is provided to MCIT’s actuary who calculates each member’s experience modification factor from which rates are eventually calculated. The MCIT Board approves rates for the coming year in August. Members receive notice of the next year’s contribution later in August to assist in their budgeting process.
The formula for calculating a member’s workers’ compensation contribution begins with assigning employees’ payroll to the proper classification code. Payroll is considered the amount of gross pay an employee receives, which includes vacation, sick and holiday pay and personal time off. Overtime, stipends and cafeteria plan contributions are also considered gross pay.
Classification codes reflect the type of work being done by the employee or official. Complete explanations of the codes are found in the MCIT Workers’ Compensation Classification Codes Handbook. Base rates are applied to each classification code and are the same for all members. The amount calculated at this point is known as the standard contribution.
The final step in calculating a member’s workers’ compensation contribution is to apply its individual experience modification factor to the standard contribution amount. The workers’ compensation contribution formula is:
Payroll (per $100) x Class Code Rate = Standard Contribution x Experience Modification Factor = Members’ Workers’ Compensation Contribution
Workers’ Compensation Experience Modification Factor
Definition: “A factor developed by measuring the difference between [a member’s] actual past experience and the expected experience of the class. This factor may be either a debit or credit and, therefore, will increase or decrease the standard premium in response to past loss experience. When applied to the standard [contribution], the experience modification produces a [contribution] that is more representative of the actual loss experience.”
Mod factors are calculated every year and are based on payroll, expected losses and actual losses. Three full years of payroll, expected losses and actual losses are used to calculate a mod. The most recent full year is not included. For example, the 2023 mod considers information from 2019, 2020 and 2021.
Consider a 1.0 mod as a benchmark. A mod factor of 1.0 does not increase or decrease a member’s workers’ compensation contribution.
A modification factor below 1.0, will decrease the amount of contribution. For example, a mod of 0.9 will decrease contribution by 10 percent: Standard contribution of $200,000 x 0.9 MOD factor = $180,000
A mod factor above 1.0 will increase the amount of contribution. For example, a mod of 1.1will increase contribution by 10 percent: Standard contribution of $200,000 x 1.1 MOD factor = $220,000
Experience Modification Factor Risk Management Recommendations
- review payroll audit information and class codes for accuracy.
- review their workers’ compensation contribution and be aware of how the experience modification factor affects the amount they pay in contribution.
- follow their claim reporting policies and procedures.
- promptly report incidents; they may or may not be an actual claim.
- review workers’ compensation claims to understand how and why the loss occurred.
- review status of open claims with their workers’ compensation representative.
- take an active role in claims management and any return to work efforts.
- utilize their MCIT loss control consultant to assist in identifying exposures and ways to mitigate risk.
MCIT recommends that members contact their MCIT risk management consultant with questions relating to their mod factor, MCIT workers’ compensation representative with questions relating to claims and MCIT loss control consultant for safety-related questions at 1.866.547.6516.