Texas' Surcharge Law for Workers' Comp
Overview of the New Surcharge System
Starting January 1, 2026, Texas will replace its existing workers' compensation "maintenance tax" structure with a more flexible surcharge system, aiming to bolster funding for regulation, fraud prosecution, and administrative oversight. The newly-enrolled Senate Bill 1455 replaces the term "maintenance tax" with "surcharge" across multiple sections of the Insurance and Labor Codes. This change ensures adequate funding for workers' compensation insurance regulation while protecting Texas-domiciled insurers from retaliatory taxes in other states.
Significant Rate Increase
The new law dramatically increases the maximum combined assessment rate from 0.6% to 2.7% of gross premiums. That jump gives the Texas Department of Insurance (TDI) and the Division of Workers' Compensation authority to collect sufficient revenue for effective oversight. Agencies can now adjust the surcharge annually—reflecting costs, projected expenses, and fraud-fighting needs—within that 2.7% cap.
Cost Recovery Options
Insurers can recover the surcharge either by including it as an expense in rate filings or passing it directly to policyholders. The law specifically authorizes an insurer to recover a surcharge by reflecting the surcharge as an expense in a rate filing required under the Insurance Code or through a direct charge to policyholders. This flexibility allows insurance carriers to choose the most appropriate method for their business model.
Funding Purposes and Applications
The surcharge funding supports multiple critical functions, including paying the costs of administering workers' compensation regulation and supporting the prosecution of workers' compensation insurance fraud in the state. Money collected under the workers' compensation system, including aggregate surcharges and advance deposits for purchase of services, is deposited in the general revenue fund of the state treasury to the credit of the TDI operating account.
Administrative Structure
Each insurance carrier, other than a governmental entity, must pay an annual surcharge to fund these regulatory activities. The commissioner of insurance is required to annually determine the rate of assessment of each workers' compensation surcharge imposed under the system. TDI sets the rate of the surcharge based on the expenditures authorized and the receipts anticipated in legislative appropriations, ensuring that funding levels match actual regulatory needs.
Implementation Timeline
The new surcharge rules take effect on January 1, 2026, replacing the previous maintenance tax system. This change represents a significant modernization of Texas' approach to funding workers' compensation regulation, providing more flexibility and adequate resources for oversight while maintaining competitive advantages for insurers domiciled in Texas.
The surcharge law ensures that Texas can adequately fund its workers' compensation regulatory framework while adapting to changing costs and enforcement needs in the evolving insurance marketplace.