Many employers turn to a Professional Employer Organization (PEO) to purchase their group insurance benefits. The belief is that the buying power of many employers will be greater than that of a single employer. While there are some economies of scale, the administrative costs of a PEO often offset the higher premiums. Additionally, there are risks that are not as apparent. Often the “benefits expert” at the PEO has a very poor understanding of how the group insurance contracts work and will provide incorrect advice to the employers.
We recently worked with a company that was part of a PEO and had an employee who was facing major surgery in December. The company was going to leave the PEO as of January 1st and would be entering into a new long term disability contract as of that date. The company called the benefits group at the PEO to confirm that the employee would be eligible to receive LTD benefits if his disability started in December under the old carrier. The “benefits expert” advised that if the company left the PEO and that insurance carrier as of 12/31, the employee’s LTD benefits would cease at that date also.
The CFO approached us and asked us to research the question. The group LTD contract specifically stated that LTD benefits would be payable to employees disabled prior to the termination date without regards to the individual company continuing group coverage with the carrier. Additionally, even if the entire PEO left the carrier, the carrier would still be on the risk for those disabled prior to the contract termination date. When we pointed this contract provision out to the PEO administrator, they actually checked with the carrier and confirmed that our interpretation was correct.
The company left the PEO and became a client of ours. They were able to purchase the benefits they wanted at prices similar and in some cases lower than the costs they were paying with the PEO. Additionally, there were significant savings in the administration costs. Finally, the client was able to work with a true benefit advisor who understood the group insurance marketplace.