The PEO: What is it and is it Right for Your Organization?

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Professional employer organization

A reader writes: Our CFO is really concerned about the rising cost of employee health care (we are currently self-insured).  He asked that I investigate the possibility of moving to a PEO.  What is this, and how can I advise whether this is a good move for our company? (We have approximately 250 employees.) 

Your CFO is not alone in concerns over the costs of health care and associated employee benefits.

While COVID 19 alone worries employers about the cost of health care and insurance, associated trends stemming from the pandemic also create additional concern.  For example:

  • Many hospitals have canceled elective surgeries. Individuals have also opted to wait even when the procedures are available. In either case, some analysts anticipate a surge in surgical procedures, and provider visits this fall and winter as patients either grow weary in waiting or feel more comfortable returning to the medical system.
  • Further testimony comes from The World Economic Forum. They offered: "COVID-19's long-lasting impact on our health could include more than 28 million canceled or postponed operations, creating a backlog that will take the best part of a year to clear." These delays may point to a surge in costs for the self-insured company.
  • Other reports indicate that some patients have forgone medical care, fearing entering a medical system already oversaturated with pandemic related cases. Postponed care usually is more expensive as conditions can worsen in the time waiting to seek care.
  • CNBC reported, "Employers are reporting premium rate increases of 3% to 4.5% for 2021 from major insurers, but they worry delayed care will result in more acute medical claims next year."  

So, your CFO may have good reason to worry about the continued escalation of healthcare-related expenses. His interest in a PEO (professional employer organization) may stem from a need to cap or reduce health care costs while providing enhanced insurance programs not typically available to smaller companies.

Why Use a PEO?

According to the National Association of Professional Employer Organizations (NAPEO),   professional employer organizations (PEOs)provide "…comprehensive HR solutions for small businesses. Payroll, benefits, HR, tax administration, and regulatory compliance assistance are some of the many services PEOs provide to small and mid-sized businesses across the country."

The "advertised" benefits of a PEO include:

  • ​Through improved and consistent regulatory compliance fulfillment, PEOs help businesses improve productivity, increase profitability, and focus on their core mission.
  • PEOs can provide the employees of small businesses access to "big-business" employee benefits such as 401(k)plans; health, dental, life, and other insurance; dependent care; and other benefits not available to employees of a small company.
  • Benefit plan costs are established based on the PEO's pool of covered employees reducing potential costs, annual increases, and self-insured out of pocket costs.
  • Companies with multi-state operations can rely upon their PEO to handle all local regulatory reporting and compliance.
  • PEOs operate in a co-employment model where they assume responsibility for the administration role for the company relative to employees. There is no loss of control over the work done. Work assignments, hire and fire decisions, along with compensation packages all remain the purview of the actual company.
  • According to a recent study by noted economists Laurie Bassi and Dan McMurrer, businesses that use PEOs grow 7-to-9% faster, have 10-to-14% lower employee turnover and are 50% less likely to go out of business.

Is a PEO Right for Your Organization?

One can readily appreciate the CFO's interest in saving money, increasing compliance, and improving employees' benefit plans. The question remains: is your company a candidate for a PEO?

Anne Reilly Papantonis, CoAdvantage's Business Consultant, provided the following set of questions to test whether the PEO model will work for you:

  1. Why are you considering a PEO? What are the driving factors?  She urges companies to test their motivation for the desired change to ensure they get what they initially seek.
  2. How many employees do you have? The sweet spot for many PEOs is from 1-250.  Some PEOs specialize in specific industries and cap the number of employees to no more than 100. Increasingly, however, larger PEOs are seeing mid-size companies (with as many as 1,000 employees) seeking their services.
  3. Calculate the potential cost savings. It is important to remember there are PEO administrative fees. Are the savings sufficient to satisfy the cost-saving expectation alone?
  4. What administrative responsibilities should be handled by the PEO? Can you accomplish the elimination of silos within HR?
  5. Can you improve compliance with all regulatory requirements?
  6. Does your company culture align with the prospective PEOs?
  7. What changes can/should be made to the HR organization to support the PEO (e.g., who will be the primary contact for your company and the PEO)?
  8. Does the leadership team understand the impact of the changes that come with a PEO? Papantonis advises that communication is essential. Leadership and employees alike will need to understand the changed processes, procedures, and technology platforms.
  9. The implementation of a PEO solution takes work. Companies should be prepared to run parallel systems for a couple of "payroll cycles" and endure a learning curve. he more assumed by the PEO, the greater the amount of time required to implement this co-employment approach.

Interest in this model has increased substantially during the COVID 19 pandemic. A PEO handles all employee-related paperwork, such as the material required to apply for the Payroll Protection Program (PPP – a truly cumbersome process). 

With federal, state, and even local programs requiring paperwork, data, and even analytics.  Companies are understandably considering all options to reduce costs, preserve the future of the business, and better serve employees. PEOs are receiving a great deal of attention, and human resource professionals are well-advised to learn much more about this option for managing HR transactions and HRIS platforms.

Treat yourself to learning something new today, and every day.

Stay healthy and wear your mask!

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