Have You Outgrown Your PEO, and What Comes Next?

According to The National Association of Professional Employer Organizations (NAPEO), 17% of all US businesses with 10-99 employees turn to PEOs for HR, payroll, benefits, and compliance solutions.

Many emerging companies want a “one-stop shop” to help set up their payroll and benefits.  Others cite lower medical costs vs. procuring insurance on their own, especially during the startup phase.  Since the pandemic boom of virtual and hybrid work models, more businesses have employees spread out in multiple states—and having a partner that can help with the associated complications to payroll taxes and compliance is another reason to use a PEO.

However, did you know that PEOs typically charge between $1,500-$3,000 per employee annually, often with hidden fees?  Meaning, that as your headcount grows to 35 or more employees, your administrative costs with a PEO can balloon to over $100,000 per year!

Thus, as your company grows, it is important to revisit the potential cost benefit of going out on your own, as the initial savings of lower healthcare costs may no longer be compelling with the PEO.  Our clients who have moved off the employee leasing relationship with a PEO cite the following reasons for their decision:

• Expense does not justify the value
• Lack of proactive HR support
• Lack of resources and system limitations
• Desire to gain more control
• Simply outgrown their initial intentions

At the same time, it is important to note that working with a PEO can establish a lot of “hooks” into a business that can make the decision to separate more complicated.  Such as:

• Payroll being processed under the PEO’s name and Federal ID#
• Some State Tax Withholding ID#’s and State Unemployment ID#’s are under PEO
• Employee benefits—medical, dental, vision, life/disability, voluntary benefits, and pre-tax benefits like FSA, dependent care and HSAs are under PEO
• PEO controlled benefit administration—processing new hires, employee changes and terminations with each carrier, and reconciling your benefits to payroll and COBRA
• Workers’ compensation coverage under PEO
• Human Capital Management (HCM) Software from PEO
• HR policies (i.e. Employee Handbook and compliance training programs) under PEO

As you scale your business, it is prudent to re-evaluate your PEO relationship and associated costs.  Once you have over 25 employees who are enrolled on your medical plan, you should consider alternative options.

To determine if there are significant financial savings to be gained, we have found that the financial analysis comes down to two major factors: the current administrative costs between transparent and hidden fees with the PEO, and overall medical costs.  With “apples to apples” quotes on prospective medical plan and administrative costs with a new provider of payroll, benefits administration, workers’ compensation, and HCM software (Human Capital/Resource Management)—you can quickly ascertain if there are significant financial savings to a switch, or if you are still receiving enough value from your existing PEO relationship.

If there are financial savings to be had or if you want more control and better services, then you’ll need to consider how to efficiently “un-hook” from the PEO and who you will work with to best facilitate the switch.

When using a separate benefit broker, payroll company, P&C broker for workers’ compensation, and HR consultant—it may be difficult to assess the overall costs/savings as you find yourself trying to hold this project together with the potential of important details and cost-saving opportunities falling through the cracks.

We highly recommend working with an integrated partner that can procure your benefits, workers’ compensation, payroll, HCM technology, and establish new payroll Tax ID#’s and a Federal ID# under your company’s name—to provide you and your employees with a “soft landing” that will ensure a successful transition.

For over 22 years, HR Knowledge, a Hilb Group company, has specialized in helping businesses transition smoothly away from PEOs while providing detailed cost and service comparisons.

Evaluating your PEO’s continued fit for your company is your fiduciary responsibility. Taking control of benefits, policies, and HCM technology to best represent your employees and the growth potential of your company can be a proactive step to help position your business for future goals.

Feel free to reach out directly to see how we can help you explore options.

HR Knowledge, Hilb Group, and Ken Bettenhauser are not affiliated with Lion Street Financial LLC.