Professional Employer Organizations (PEOs) have emerged as a vital solution for businesses looking to streamline their employee benefits management. By partnering with a PEO, companies can effectively outsource the administration of employee benefits, payroll, workers’ compensation, and other HR tasks. This co-employment model may allow businesses to offer a broader range of benefits, and possibly at a lower cost due to the PEO’s purchasing power. However, there are trade-offs that exist due the loss of some control.
According to the National Association of PEOs (NAPEO), the number of PEO users has risen by 40% since 2008, and the trend of businesses joining PEOs is expected to continue growing. The pandemic, with the surge in remote work, has expanded many firms’ geographic reach. Employers with workers in more states are more likely to utilize a PEO – 25% of those with workers in 10+ states use a PEO compared to 11% with workers in 5-9 states.
Advantages of PEOs
The following are some of the benefits of hiring a PEO:
- Employers do not need to spend time and resources on HR tasks. Instead, they can focus on their core business and growing their bottom line.
- PEOs can provide consistent administration for larger companies, and often improved technology resources.
- PEOs may provide smaller companies access to options they wouldn’t otherwise have the buying power to obtain.
- PEOs may be able to negotiate better insurance coverage because of the volume of business that they cover.
- Some classes of business–such as transportation–may be able to benefit from options that could not be accessed through traditional markets through a PEO.
- When the PEO assumes its client’s payroll into its own accounts, it also assumes the liability for clients’ employees because it is technically now the legal employer.
Disadvantages of PEOs
The following are the potential cons of hiring a PEO:
- A company no longer has employees after hiring a PEO. The company essentially fires all of its employees, who are then rehired by the PEO.
- By hiring a PEO, the company loses control and flexibility concerning compensation packages allotted to its employees. Though a company can decide how much to pay each of its employees, it has limited say on the benefits plans offered.
- Companies lose a bit of control over their workers since they are officially employed by the PEO.
- Increased fees from the PEO may not offset the volume advantages gained.
- It’s essential that organizations understand their claim situations in order to evaluate whether they may be subsidizing large claimant costs from outside your organization.
In a PEO, the cost to participate to members would be the average price point, but with large claimant costs, a very small number of participating groups in the PEO could be raising the cost for the rest of the members. Average does not mean half the groups, in some cases, the large majority of groups could be “below” average due to an outlier.
For example, here are the total claims per group for a year:
-
-
- $1,100,000
- $100,000
- $100,000
- $100,000
- $100,000
- $100,000
- $100,000
- $100,000
- $100,000
- $100,000
-
Total Claims = $2,000,000
The PEO needs to allocate $2,000,000 over 10 groups to break even so each group has $200,000 of cost. If you are one of the groups with only $100,000 in claims, you are paying for the high-cost claimants of group 1.
Funding Options for Employee Benefits Through PEOs
PEOs present several innovative funding solutions for employee benefits:
- Master Health Plans: By pooling employees from multiple companies, PEOs can negotiate lower rates for health insurance than a single business might achieve alone.
- Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs): These accounts offer tax-advantaged ways to save for healthcare expenses, making benefits more affordable for employees.
- Retirement Savings Plans: Access to 401(k) plans with better investment options and lower fees can be facilitated through a PEO arrangement.
How Kapnick Can Enhance Your Benefits Experience
Choosing the right PEO and understanding the myriad funding options can be complex. This is where Kapnick Insurance can provide invaluable assistance. Our approach as a benefits brokerage entails:
- Personalized Consultation: We work with you to understand your unique business needs and goals.
- Customized Funding Strategies: We guide you through the various funding options, helping you make informed decisions on structuring your employee benefits in a cost-effective manner.
- Ongoing Support: Our commitment to excellence means we’re with you every step of the way, from implementation to ongoing management and support of your benefits plan.
Leveraging a PEO can significantly enhance your ability to offer competitive, comprehensive employee benefits. With Kapnick’s expertise, navigating the complexities of PEOs and funding options becomes a streamlined, customer-focused process, allowing you to focus on what you do best—growing your business.
