Why growing businesses transition away from PEOs

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 that have no in-house human resources team. But how do you know whether you’ve outgrown that solution?

For high-growth companies, it’s a critical question. Many firms stay with a PEO too long. Often, 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. Here are three reasons it might be time for your company to leave your PEO:

  1. Low workers’ comp claims — If your business doesn’t have high workers’ comp claims, there typically aren’t many reasons to stay in a PEO as your business grows past 20 employees.
  2. High cost and fees — 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 quite expensive. Likewise, 401(k) fees charged by PEOs can be higher than those sourced through a retirement services broker. Another often overlooked financial cost is tax credits and workers’ comp dividends that would normally go directly to an employer but instead go to the PEO. These credits are not passed on to the employer.

    The administrative fees charged by a PEO for a manufacturing firm typically average $1,500 per employee, per year. These fees are “bundled” and are not clearly shown on an employer’s invoice. For example, a 75-person manufacturing business would be charged an average of $112,500 every year.

    Partnering with the right health insurance broker that provides hands-on support and a payroll company with the right technology can save a business thousands of dollars annually.

  3. Lack of PEO customization — Businesses tend to outgrow their PEOs as they expand because many PEOs are not well-suited to creating affordable, fully customized benefit programs. PEOs are effective in creating out-of-the-box benefits packages. However, their one-size-fits-all approach might not work well once companies scale and require more tailored programs.

What to consider 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).

  1. 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, your existing 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 best to avoid what amounts to double taxation.
  2. 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 the CPEO’s payroll.

Steps to start the transition

If you want to explore options outside your PEO, we recommend following these steps:

  1. Create a census file. This document lists your benefit-eligible employees and their dependents. It also stores valuable demographic information, such as age, gender, location and plan elections.
  2. Give your broker your PEO benefit overview and plan summaries. This will allow your broker to review the current plans that are in place and determine how best to create new programs.
  3. Provide your broker with your PEO invoice, rates and employer contributions. These documents facilitate financial comparisons and help determine what plans are popular. They also benchmark your company against others in your industry for competitive purposes.

Transitioning from a PEO to an insurance broker can be completed in as few as 60 days. 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.
Superior Benefits Inc sets the standards for innovation, and we’re ready to provide the guidance your company needs to navigate the complex world of benefits solutions so you’ll be more informed and more confident in the benefits plan you design for your employees.

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