Pluses & Pitfalls of the PEO
A few years ago, like many other CFOs, I received a phone call from my benefits broker so we could review the numbers for the upcoming plan year renewal. While holding my breath I asked the question “What’s the increase?” and the response led to serious heart palpitations! Even with hundreds of employees, any major health issue with even one can cause rates to skyrocket from year to year. The company just didn’t have enough purchasing power and what we were left with was the prospect of double-digit increases which wasn’t good for either us or our employees.
After considering plans with higher deductibles and less coverage to mitigate the rate increases, it seemed like a short-term fix to a long-term problem. We would have to settle for less desirable plans every year but pay the same. That’s a definition of insanity. So I revisited an idea I had a few years prior – going to a PEO (professional employer organization).
Not everyone is familiar with the concept of a PEO so let me take a few minutes to explain how it works. Essentially, your company and the PEO become “co-employers” for your workforce. The PEO is the “employer of record” for tax purposes and the W-2’s your employees receive will show their employer as being the PEO. Your company is responsible for managing the workforce on a day-to-day basis. There are a few other nuances to the relationship but that’s it at a high level. By combining your employees with other companies’ employees, the PEO is able to provide a much larger pool of participants to the health insurance companies and negotiate better rates. Not a bad deal if you are facing out-of-control increases when you’re by yourself!
There are lots of PEOs in the marketplace, both regional and national players. Some only provide health insurance and payroll services. Others have an entire suite of products including HR services which amounts to outsourcing your HR department. The level to which you want the PEO to be involved is really up to you. I know lots of companies that only joined a PEO for the health insurance and they are content with that. But I thought if we’re going to go down this road, let’s look at the entire package to see what efficiencies could be gained before settling on what PEO to team up with. At the outset, there was trepidation from our executive team (including me) about the prospect of giving up control. It turns out our fears were unfounded. What we ended up with was a hybrid situation with the majority of the administrative tasks being shifted to the PEO freeing up our HR team to do the important things to help employee retention and company specific compliance items.
There were a few bumps early in the relationship related to employee terminations. But once our PEO had a better understanding of our business and our goals, and once we made some tweaks to the employee performance management process, things have been smooth since. The important takeaway here is to make sure if your PEO is more involved than just providing health insurance and payroll, take the time to educate them on what is important to you, what your goals are as an organization and why you do things the way you do. It is equally important to be open to making changes. Your PEO has plenty of experience and can provide advice on best practices to reduce risks down the road. As co-employers, you are a TEAM and managing the relationship is vital to success.
I will offer up this list of things to consider if you are looking at different PEOs based on quotes and conversations I’ve had with some of the bigger providers in the market.
Understand how the fees work. This can vary widely from a per check fee to a percentage of compensation. You need to think about how you compensate your employees. If there are large bonuses or commissions in your structure, the percentage of compensation model can put a huge ding in your bottom line.
Ask who gets the benefit of the FICA savings related to the cafeteria plan. Considering that’s over 7% of whatever health insurance premiums your employees are paying, it can add up and it’s better in your pocket than the PEO’s.
Find out if they offer an EPLI (employment practices liability insurance) policy, what coverages they offer, if it includes a legal defense benefit and how much it will cost you. This insurance coverage is one of the more expensive ones employers pay for and it may be advantageous to move your policy under the PEO instead of self-insuring. If you move to a PEO’s policy, you will need to consider gap insurance since EPLI policies are usually claims-based meaning the date of the claim determines coverage instead of the date of the incident. PEOs will not take responsibility for things that occurred before the partnership was formed.
Get a demo of their system and ask if it runs off of one database or if the different components are patched together. From the perspective of efficient and seamless processes, this is an important consideration.
Is the PEO certified? Clients of certified PEOs (CPEOs) are not held liable for unpaid federal employment taxes once they have remitted them to the CPEO. If your PEO is not certified, and they don’t remit the withholdings to the IRS, you will be on the hook for making sure the government gets the money.
This is by no means an extensive list but key things you should look at when making your decision. All in all, my experience in the PEO world has been worthwhile and there have been no regrets.