New California Rule on Restricted Stock Units Could Increase Your Workers' Comp Premiums

Recent regulatory changes could have a huge impact on workers' compensation premiums for California companies that use stock grants to recruit and attract employees. The key target of the new regulations are pre-initial public offering firms that grant restricted stock units to their staff.

Background

Budgeting for workers' compensation premium can be challenging for fast-growing employers. If payroll increases significantly over the course of the particular policy term, the annual payroll and premium audit conducted post-expiration could result in a large additional premium bill. Along with general business growth, grants of stock shares (otherwise known as Restricted Stock Units or RSUs) can contribute to unplanned increases in the payroll totals, which can create a significant additional cost in the final workers' compensation premium calculation.

The Issue

The rules for the treatment of stock grants in premium calculation purposes have historically been vague and subject to varying applications by insurers. On January 1st of 2019, the California Workers' Compensation Insurance and Rating Board (WCIRB) definitively clarified the issue.

The WCIRB amended the definition of payroll to include equity-based compensation plans such as stock transfers, stock warrants, restricted stock units, phantom stock plans, and stock appreciation rights as remuneration (payroll). The value of the stock at the time of vesting, whether on a scheduled or annual basis, must be included in final payroll reported to the insurer for audit purposes. Details on the regulatory change are available here: https://www.wcirb.com/sites/default/files/documents/usrp_regs_only_2019.pdf

The WCIRB chose to clarify the payroll reporting rules in order to standardize the payroll reporting practices for all California employers. The WCIRB utilizes the payroll reported to insurance carriers for a variety of reasons: to analyze statewide trends, establish the pure premium loss rates for individual classification codes, and calculate experience modifications.

To the contrary, NCCI (National Council on Compensation Insurance) rules are silent regarding restricted stock plans and stock dividends. Typically, stock bonus plans are included as payroll, in accordance with the basic manual. However, regarding restricted stock plans, there is no published rule and the insurance carriers decide whether it is included as payroll, and if the payroll will be included in the premium calculation.

The Exception

Based on research and input from employers, agents/ brokers, and insurance carriers, the WCIRB understood the severe financial implications associated with a drastic increase in the value of stock and the adverse effect it would have on premiums. As such, the WCIRB has allowed for two specific exceptions. The market value of equity-based compensation plans (RSUs) shall not be included when accelerated cliff vesting is triggered by an IPO (Initial Public Offering of Stock), or when a business undergoes a change in ownership such that the previous majority owners now control less than 50% interest after the ownership change. In both of these situations, the value of the gifted stock (RSUs) is not to be included as payroll.

The Net Effect

WCIRB's new rule finally clarifies that vested stock grants must be included in payrolls reported to insurers. While the rule clearly creates the risk for unplanned premium increases, there is some good news for fast-growing companies who use stock grants. WCIRB remains silent as to whether insurers are actually required to collect premium on the value of the stock grants.

It is critical that employers and their brokers proactively address the treatment of stock grants with underwriters as part of the renewal negotiation process. Insurers typically have discretion to exclude special compensation (RSUs and stock grants) from premium calculations. But without an upfront agreement in the renewal proposal,  California companies could be in for a surprise premium bill.

If you have questions, please contact your Woodruff Sawyer Account Executive.