Considerations for transitioning out of a PEO
Professional Employer Organizations (PEOs) were developed in order to provide a service that would allow small companies to focus on the more important task of running and growing their business. PEOs contract with small to mid-size companies to assume and manage the responsibility of the employer. The PEO will provide an array of services to a small company, such as risk management, personnel management, human resources and payroll functions, claim management for workers compensation and unemployment insurance, and tax compliance. One of the PEO’s most important functions is to provide comprehensive employee benefit packages, including group health, life, disability, and 401(k) plans. Many smaller organizations find it beneficial to join a PEO as a way to lower the cost of plan administration fees, since they are able to pool resources with other companies. A PEO also handles payroll and other benefit administration services, which can help save time and staff for companies with very limited resources.
While PEOs can provide a good employee benefits solution for a small company in the early stages of development, they will not necessarily be a cost-effective way to provide benefits once the company has grown. After crossing the 25-employee threshold, it becomes critical to consider other options for providing competitive employee benefit programs. Employers must be cognizant of the many cost, transitional and investment control issues that come with using a PEO.
For example, while PEOs bring a level of insurance buying power to a small employer that is otherwise unavailable to them, things may change as they hire more employees. As a company grows beyond various underwriting thresholds to have 25, 50, or 100 employees, the odds increase that a stand–alone benefits program will be more cost-effective and flexible than what a PEO can provide. As a company moves to transition out of their arrangement with a PEO, particularly off the calendar year cycle, the company then assumes the role of sole employer, with all attending responsibilities, including monitoring compliance with employment laws, developing policies and procedures for the workplace, and assuming liability for the payment of wages. Along with transition issues, companies involved in a PEO lose control over investment options and 401(k) plan administration. Since the PEO assumes responsibility for the overall monitoring and record-keeping of these plans, companies do not have the same leverage and decision-making power.
About the Author
James Richardson is a Client Executive at William Gallagher Associates. As a member of the Employee Benefits Group, he advises emerging and middle market life science, biotechnology and professional services companies on retirement plan matters.