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Why Transitioning Away from a PEO May Make Sense for your Business

Posted by Jacob Schaaf, Client Executive, Employee Benefits Division on September 24, 2018 at 10:00 AM

This article was first published in San Francisco Business Times.

Professional Employer Organizations (PEOs), which provide outsourced HR services such as payroll, benefits, workers’ compensation and 401(K) administration, can be a terrific option for smaller companies without an in-house Human Resources team. But how do you know whether you’ve outgrown that solution?

PEO ImageFor high-growth companies, it’s a critical question. Many firms often stay too long with a PEO when an in-house HR team supported by a full-service business insurance broker can provide more services and ultimately achieve the intended goal: attracting and retaining a high-quality, diverse workforce.

Why Leave a PEO?

As companies grow, their needs change.

To compete in today’s full-employment economy, organizations need a cost-effective HR program customized to their specific needs. Tech companies often have different HR and benefits requirements than life science companies. Likewise, manufacturing firms and nonprofits often require different strategies to compete and win.

One reason firms outgrow their PEO is that PEOs are not well-suited to creating affordable, fully customized benefit programs as firms expand. PEOs are effective in creating an out-of-the-box benefits package, but their one-size-fits all approach may not work as well as companies scale and require more tailored programs.

Another reason firms move on from their PEO is cost. PEO fees are often based on a percentage of an employer’s total payroll. For organizations with a large and growing payroll, and/or highly compensated employees, PEO fees can get very expensive. Likewise, 401(K) fees charged by PEOs can be higher than those sourced through a retirement services broker. Another often overlooked financial cost: Tax credits accrue to the PEO, and not your organization.

Best Practices After Leaving a PEO

An employee benefits broker is the natural next step for growing companies that establish in-house HR teams.

Brokers often have the expertise and relationships to develop tailored, comprehensive programs. They can also secure competitive pricing from providers to offer more full-featured benefits and insurance coverage.

In evaluating a broker, it’s important for HR teams to ask the following:

  • Does the broker have a technology advisor to help evaluate payroll, human capital management (HCM) and benefit administration systems?
  • Does the broker provide 401(K) consulting?
  • Does the broker provide business insurance services, including workers’ compensation and employment practices liability insurance?
  • Does the broker have a team of specialized experts who can provide ongoing advice and counsel?
  • Does the broker offer a high level of client service?

If these criteria are met, take these first steps in engaging a broker to evaluate your programs:

  1. Provide a Broker of Record letter. The document, on your company letterhead, will allow the broker to confidentially conduct business on your behalf with the insurance marketplace. This does not mean they will contact the PEO or impact your existing relationship until you request it.
  1. Create a Census file. This document lists your benefit-eligible employees and their dependents, and provides demographic information, such as age, gender, location, and plan elections.
  1. Provide your PEO benefit overview and plan summaries. This allows your broker to review the current plans in place to best determine how to create new programs.
  1. Provide PEO invoice, rates, and employer contributions. These documents assist with financial comparisons and help determine what plans are popular. They also benchmark your company against industry for competitive purposes.

Considerations When Leaving a PEO

If you decide to leave your PEO, there are number of key considerations, depending on whether you are working with a PEO or an IRS Certified PEO (CPEO).

If you’re exiting a non-certified PEO, it’s usually best to wait unit January 1. By doing so, you’ll avoid employment tax liabilities for your business and your employees. When exiting a PEO mid-year, employees become new employees of your business for tax purposes. That means employment taxes paid throughout the year are not transferred and tax accumulations start over. While employees can get credit when they file taxes, it’s definitely preferable to avoid what amounts to double taxation.

For a PEO that is a certified, a mid-year exit sidesteps double taxation and allows for a change any time during the year. That’s because the CPEO is considered a predecessor employer. The client company is treated as the successor employer. In this case, the employer will be able to tack on wages already paid when moving employees off of the CPEO’s payroll.

Transitioning from a PEO to an insurance broker can be completed in as few as 60 days. However, the most important part of the process is conducting the due diligence to find the right broker. That decision can make all the difference in powering the growth of your company. Having a strong and effective HR program is what maintains the very lifeblood of your organization: your employees.

Interested in exploring options outside a PEO? Learn how Marsh & McLennan Agency can help design an Employee Health and Benefits program that is right for you.

As a Client Executive at Marsh & McLennan Agency’s (MMA) Employee Health and Benefits Division, Jacob has over 15 years of industry experience designing employee benefits programs and working with many leading Bay Area industries such as technology, life science, non-profit, among others.

Topics: Employee Benefits, Healthcare

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