Getting Out of a PEO

PEOMany small to mid-size employers have looked to PEOs as an affordable HR outsourcing solution for managing liability and controlling the cost of health care and worker’s compensation insurance. The events of the past year have prompted employers to re-think whether co-employment will still offer the same benefits it once had. One of the questions lingering is how new legislation around health care reform will affect PEOs and their clients. There is a case to be made that administratively the PEO will help employers track the new changes in legislation such as tax credits, new HSA limits, and employee enrollment in the new health care exchange. However, is this really a benefit to the employer or to the PEO? Who is the “employer of record” in the eyes of the IRS? Will the PEO be receiving the tax credit or the employer? Will the size of the employer even be considered since participation in a PEO pools several employers together? How will this affect the penalties and/or tax credits? The way regulatory authorities (such as the DOL, IRS, Department of Health and Human Services) treat PEOs has always been a bit uncertain and inconsistent and now, with the upcoming health care reform changes, it will only create more confusion.

In addition to the unknown future for PEOs, many employers are no longer benefiting from lower health insurance premiums like they once did. In years past, many PEOs were able to offer health plans that were less expensive than the national average and could guarantee renewals that were lower than the trend (10-13%). This past year proved that this no longer the case as many PEOs delivered renewals upwards of 35% to their clients.

If you are an employer that is wondering whether the PEO relationship is still a good solution for your business, consider these four questions carefully to determine whether the value of the PEO is worth the expense and furthermore how to craft a plan of action for leaving the PEO. Often it is very difficult to determine your true costs so seeking outside help may make sense and mitigate any confusion.

Questions to Ask When Evaluating Leaving a PEO

  1. Am I being serviced from an HR perspective so well that, without the PEO, I would have to hire someone internally to replace them?
  2. Can I obtain similar health coverage at a comparable rate outside of the PEO?  How do the last few years’ renewals with the PEO compare to the national average?
  3. Can I obtain similar Workers Compensation and EPLI (Employers Practice Liability Insurance) coverage outside of the PEO at a comparable rate?
  4. Will my SUI (State Unemployment Income) rate be higher or lower as compared to that of the PEO?

If you are unsure about at least one of these questions, a cost analysis is definitely worth conducting. In many cases, an employer may be getting a good deal in one area yet could be overpaying in another.

The cost to consider is a fee that many PEOs call Administrative Costs or an Admin Fee. This fee could be shown as a flat per employee per month rate or it could be shown as a percentage of the total payroll and combined with other cost components such as SUI or Worker’s Compensation. The Administrative fee is where the bulk of the profit margin lies for the PEO and when the services are bundled, it makes it easy for the PEO to shift costs so they remain profitable.

In order to get a full understanding of the financial impact of moving away, ask your PEO to break out each cost area separately: Benefits, Workers Compensation, EPLI, SUI, and Administrative fees. You then have a basis to compare costs as a stand-alone group outside of the PEO. The only sensible way to compare is to look at the total cost WITH the PEO versus the total cost OUTSIDE of the PEO. The only cost that will remain constant in or outside the PEO is employer-paid FICA and FUTA taxes.

The Five Cost Components to Shop

  1. Health Insurance and other related benefit products including STD/LTD, Life Insurance, Vision, Dental, COBRA, FSA, and HSA
  2. Workers Compensation/EPLI
  3. SUI – this rate will be the manual rate for a new business in each state
  4. Payroll/HRIS services
  5. Fractional HR or the cost of hiring an HR resource

If you are utilizing the PEO’s 401(K), add this to the list items to consider.

The timing of the transition away from the PEO must be considered because of tax implications to both the employer and employees. Making a change later in the year will have a greater impact because more employees will have met their Social Security wage requirements and employers will have met their SUI and FUTA limits. Employees will have to adjust this when they do their tax return because they will have an overpayment. The tax duplication payments need to be deducted from any savings if you are looking to make a mid-year switch.

Also, an employer’s unemployment experience rating adjusts as if the employer were a new business in each state that it has employees. This could have either a positive or negative impact on the employer and should be considered in the financial analysis as well.

Evaluating getting out of a PEO and actually making the transition can be very confusing and time consuming. Centripetal Consulting Group can help you alleviate the guesswork and complete the financial analysis. Depending on the outcome, we can help transition you off the PEO and help select vendors from our network of over 100 top-rated HR outsourcing providers.  Contact us today for a free consultation.

About Amy Grimmer

Amy Grimmer currently serves as President and CEO of Centripetal Consulting Group (CCG). Grimmer founded the company in 2007 with the concise mission to revolutionize the positive business impact that employers realize through HR Outsourcing. Both CCG clients and its HR services vendor network of HR look to Grimmer and CCG’s associates as a trusted, unbiased resource to understanding the complexity of HR Outsourcing. Grimmer’s vast knowledge of the HR Outsourcing space, CCG’s client focused approach, and the continued rapid growth in the HR Outsourcing industry are all contributing factors to the success of Centripetal Consulting Group.
Prior to founding CCG, Amy Grimmer served the human resource outsourcing industry in a business development capacity. Her experience spans several functional HR practice areas including HR Outsourcing Strategy, Payroll/Tax Filing, HRIS and Benefits Administration, Health & Welfare Consulting, Retirement Plans, Workers Compensation, PEO/ASO Arrangements, HR Compliance, and Recruitment Process Outsourcing. Grimmer’s prior employers include Ceridian, ADP, Aerotek, Advantec, and RSM McGladrey Employer Services.
Amy Grimmer exhibits extreme passion and dedication to the HR outsourcing industry and is an avid networker, author, and student of her profession. Amy has published several articles, whitepapers, and E-Books on various topics within the HR Outsourcing space.
Amy is a graduate of the University of Missouri and holds a BA in Communications and a BA in English. She has completed coursework for her Masters of Business Administration in Human Resource Management at Lindenwood University.

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