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Is it Time to Revisit [or Review?] Your PEO Arrangement?

Originally posted September 29, 2014 by Bill Olson on https://ubabenefits.com.

The Patient Protection and Affordable Care Act (PPACA) is driving companies to look at many aspects of their organization more strategically. With an estimated 2.5 million people in Professional Employer Group (PEO) arrangements totaling $92 billion in annual revenue, the spotlight was cast on them (source: https://www.napeo.org/about/annualreport.pdf). The questions related to the implications of PPACA on PEOs are many, and the law is still out for interpretation.

With this in mind, I have always said that there is a place for PEOs… and they sometimes make sense. However, in my opinion an organization that has grown from the average PEO size of 20 employees (source: https://www.napeo.org/about/annualreport.pdf) to more than 100, likely has an administrative cost higher than a similarly situated organization with a true employer-employee relationship. Keep in mind that in most scenarios the point of a PEO is risk and cost mitigation, but as an organization grows, administrative personnel and functions such as payroll servicing, hiring & firing, training, etc. are still needed internally. Additionally, with companies in the 100 to 250 employee range, most health & welfare benefits are pooled, already reducing exposure to medical loss risk. As a company grows past the 250 employee range, cost may be mitigated in other forms such as employee well-being programs, self-funding arrangements, or participation in captives for a variety of insurances. So, if you are a company of more than 100 employees (which is a subject employer under PPACA), then here are seven easy steps to moving out of a PEO.

  1. Decide if it is the right choice for your organization by doing a cost analysis. The cost analysis should include a complete breakdown of everything from workers’ compensation, employment practices liability insurance (EPLI), all health & welfare benefits, retirement plans, human resources, and administrative costs. To best judge these costs and benefits, they should be benchmarked in some fashion. For the health & welfare benefits, the best option is a robust health plan and ancillary benefits survey such as the United Benefit Advisors (UBA) Annual Health Plan Survey and the UBA Ancillary Benefits Survey. Utilizing these tools, your UBA Partner can outline the most appropriate costs and benefit levels for your company based on industry, employer size, state, region, and how it compares to national data.

    Steps two, three, four, and five involve understanding what a company currently provides and what it would like to provide post-PEO.

  2. Payroll and HRIS. There are many choices in an ever growing sea of vendors. The best bet is to look for a payroll and Human Resources Information System (HRIS) partner. This would be a company that is looking to the future of technology and is willing to understand the organization’s unique needs. With cloud-based technology becoming the predominant option here, technology companies are really the answer over payroll processing companies. People want the ability to access their information at anytime, anywhere, securely, and on their mobile device. While there are many companies that say they can do this through a variety of looped and bandaged-together products, there are very few with truly cloud-based platforms that were designed from the ground up for today’s users. One worth looking at is Paylocity.
  3. Business insurance: This piece is a driver of many organizations to join a PEO. As stated earlier, risk mitigation (especially with workers’ compensation insurance) is great for small companies. However, requesting an experience modification worksheet from your PEO along with the last five years of loss runs can be an enlightening experience. Couple this with a loss control visit, and I would venture a guess that the PEO will change its tune. Also, according to the California Department of Industrial Relations: “The fact that you engage a PEO does not release you from liability. Employers have a responsibility to ensure their workers are covered by a valid workers’ compensation policy. So before you turn your vital programs like workers’ comp and payroll over to a third party, be sure you are dealing with a reputable, legally insured PEO.” (source: https://www.dir.ca.gov/peo.html).
  4. Retirement: Understanding the entire program that is currently offered to the co-employees (or leased employees within a PEO) can be difficult. A PEO should be able to outline the costs and assets allocated to the portion of the retirement plan that accounts for the company in question. When transitioning out of the PEO’s plan, it is important to schedule individual meetings with all employees in order to properly explain the new employer sponsored retirement plan and how to rollover any existing funds from the prior plan. These funds will be crucial in building up the retirement plan assets to reduce the costs applied.
  5. Health & Welfare: As previously mentioned, benchmarking your benefits is integral. Moving out of a PEO opens the company to the entire market of choices. Knowing what the right fit is for the company in question will allow the management team to allocate the proper funding type and contributions. Request for quotes, carrier negotiations, benefit modeling, decisions, implementation, and enrollment – all must come and be aligned with the latest health care reform rules, regulations and guidance, in order to avoid significant penalties to both the organization and potentially to the employees.
  6. HR Manager: While most companies with more than 100 employees will agree that they need an HR manager, they may have divergent opinions on when to bring them into the fold. One school of thought is that the HR manager to be hired should be part of the process, included in business partner decisions and selection. The second option is that the company team, with or without outside assistance, drives the process and implements each step. This culminates with the hiring of an HR manager to assist in the final enrollment and implementation pieces of the new startup programs. In either method, it is crucial that the company culture be outlined at all levels. While a company may have been in existence for many years, moving out of a PEO is much like starting a new company. Many of the same pieces must be played strategically in order to garner the best result for long-term sustainable growth that attracts and retains the best and brightest team members.
  7. The Final Step: Don’t forget to read the current PEO contract. Many organizations fall victim to termination guidelines and/or costs. Be savvy and aware of the pitfalls, and make sure that the PEO is duly notified in writing of the intention to dissolve the co-employment relationship as of the proper future date.

And that is all. With proper notification to the PEO, an organization can move out of a PEO relationship in just over one month. Generally speaking, it is ideal to move out before January 1 to reduce the payroll tax implications. Ultimately, partner with an advisory firm that can guide the company through the process and the first payroll will work out just right.