Insights

Is it Time to Leave Your Professional Employer Organization (PEO)?

July 5, 2020

Employee Benefits

Professional Employer Organizations (PEOs) provide comprehensive HR outsourcing solutions for small businesses, allowing small business owners to focus on the core aspects of running their business.  This is especially important when you are getting your business off the ground and resources are limited. Having a PEO a handle payroll, benefits, tax administration, and regulatory compliance allows the small business to tap into the structure and sale of a large organization, while leveraging economies of scale. One of the most recognizable benefits of partnering with a PEO is reduced health insurance costs.

Stethoscope on desk with paperwork and calculator

In a PEO, small companies are able to avoid age-banded medical ratings that assign premiums based on age, which is the typical pricing methodology for small group medical coverage (size will be under 50 or under 100 depending on state). This allows a small group the ability to access large group composite rates and buying power. However, being a client member of a PEO does not fully insulate a small business from their group’s risk and utilization. If a small business has high utilization, it will ultimately receive renewals above the standard PEO renewal. And, if a small business has good experience, they will receive the PEO’s standard renewal rate, and thus is not financially rewarded for its group experience.

Currently, the average client size of a PEO is around 19 employees. However, as your business grows and develops, you may be wondering if it might be time to end your PEO relationship. Signs it might be time to switch include rising costs, duplication of services, and your upgrading of systems.

When to think about leaving a PEO?

As an organization grows and matures, so will its’ HR and Employee Benefits strategies and processes. The small business advantages of partnering with a PEO diminish, and new alternatives become available, especially once a small business reaches 75-100 employees. This is when most small businesses consider exiting a PEO relationship to build a more customized approach. Signs that it may be time to evaluate include rising costs, duplication of processes, and the need to upgrade systems.

  • Has your business outgrown the standard PEO technology and support system?
  • Has the cost of the PEO become prohibitive on a PEPM model?
  • Is it time to scale internally to support a customized work/life employee culture?
  • Can you begin to make your Individual Group’s Medical experience work for you?
  • Do you need to quickly adapt your employee benefits offering and culture within regional markets to be competitive?
  • Has your employee and company growth increased the need to partner with a robust and personalized model of service?

PEOs tend to be more or less a one-size-fits-all model for HR and Benefits administration. As your business grows, one of the first challenges that surfaces is your PEOs ability to handle your growing number of transactional tasks in this area. Since a PEO’s support system is designed for the masses, it is difficult to customize for the individualized needs of a growing organization. It can also be challenging for a PEO to handle the many and varied “one-off” situations that arise.

An entirely new scope of alternatives becomes available to a large group over 100 employees. These clients will now be able to access composite rates in the large group market. Large groups are also able to add more Medical, Dental, and Voluntary options for employees to choose from. Large groups can also benefit from their utilization and experience, and implement a more customized risk mitigation strategy.

Let’s look at it another way. As your company grows, the likelihood increases that your individual group experience could be put to work through:

  • lower and more stable renewals
  • more flexibility on plan changes
  • fully/self-insured risk evaluations.

Companies also can benefit from an open market cost containment strategy and by taking advantage of carrier competition.

The traditional benefits broker/consultant partnership opens the door to customizing the employee benefits program to the group’s unique health and wellness needs. It also helps grow the employer brand and increase the communication channels for that brand. While PEOs are a strategy for some small businesses to get on par with larger, established companies,when it’s time to create a unique brand and to have employee benefits be a driver for that brand and company culture, it’s time to make a change.

Preparing a PEO Exit Strategy

Once you have determined it is time for your company to make a change, here are five steps to take as part of a successful PEO exit strategy.

  1. Partner with an Employee Benefits Broker/Consultant to support and execute the transition from the PEO. Work with your benefits broker to choose the best benefits package for your company. Choosing a broker can be difficult, so we’ve prepared some guidance to help you.
  2. Update how you handle your payroll. You will need to have a plan in place for handling payroll for employees. Any new service will likely require time to get setup, so plan accordingly so that you can continue uninterrupted service and avoid coverage lapses. HR Technology also plays an important role in handling payroll.
  3. Understand benefits administration. Research and understand various carriers and their benefits packages. Be aware of any pending claims prior to termination of the PEO as you may still need to pay administration fees until these claims are resolved. Deductibles may reset under a new benefits package.
  4. Inform employees of retirement options. Employees may need to transfer their 401(k) plans either into an IRA or the new 401(k) offering. The timing of these transfers is important to a smooth transition. This is one of many ways to help your employees achieve financial clarity.
  5. Understand employee leaves. Understand the existing policy on leaves of absence, including parental leave, FMLA, and disability leave, to honor the leaves previously granted under the PEO. Clearly communicate all leave policy changes to new and existing employees in your employee handbook. Read more about best practices for employee communications.

As with any big business decision, it can be intimidating to leave a PEO that you have been with for a while and has served you well in the past. However, when you make this transition with the assistance of your broker, it can be painless and, ultimately rewarding.

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All views expressed in this article are the author’s own and do not necessarily represent the position of Woodruff-Sawyer & Co.

Sheila Villaroman

Senior Vice President, Employee Benefits

Contributor, Employee Benefits

In addition to her specialization in employee benefits, Sheila focuses on complementary solutions that meet clients’ enterprise risk management needs.

415.399.6408

LinkedIn

Sheila Villaroman

Senior Vice President, Employee Benefits

Contributor, Employee Benefits

In addition to her specialization in employee benefits, Sheila focuses on complementary solutions that meet clients’ enterprise risk management needs.

415.399.6408

LinkedIn