What Is a PEO / Professional Employer Organization?

What is a PEO?

A Professional Employer Organization or PEO provides HR support for small and medium-sized businesses. Think of it as an outsourced HR department. Their services may include payroll processing, benefits and tax administration, and regulatory compliance.

With a PEO, smaller companies can offer their employees a broad range of benefits, often only available to larger companies, including health, dental, and 401K retirement accounts. For many businesses, the ability to provide a full menu of benefits and insurance products gives them a competitive advantage.

What can they do for my business?

Many business owners struggle to find the time to handle every aspect of growing a business. With a PEO, you can confidently outsource your HR functions. You may have an employee with a benefits question or one with a more challenging grievance. A PEO can help you and your company navigate and respond to these issues. They stay informed of the ever-changing regulatory landscape so that you and your company stay protected.

PEOs also provide compliance support and reporting. They often offer new hire reporting along with W-2 and 1099 filings and worker’s compensation management.  Since employment compliance mistakes can be costly, this is a valuable service.

Often, PEOs provide technology solutions that help small organizations streamline new hire paperwork, benefits selection, and other direct employee support. These user-friendly online systems give access to many employee-related functions saving both time and money.

Can they impact my bottom line?

PEOs offer the value of an in-house HR staff without the same cost, making them an affordable HR solution for many businesses. They service their client companies through co-employment arrangements. These contracts enable the PEOs to leverage their buying power by grouping the employees from several businesses together to obtain better rates for insurance and payroll services. And while this can reduce costs, some critics say it also limits the flexibility and choice a business owner might have on their own.

Over time, as a business grows and expands the number of employees on their payroll, a PEO may no longer be a cost-effective option. Larger companies can leverage their size to negotiate a broader selection of benefits and reduced rates.

How much does a PEO cost?

PEOs make their money by charging monthly fees to their clients. These fees may be based on a per employee model, which can cost between $40 to $120 per month depending on the complexity of services. Or a fee based on a percentage of total payroll. This can range from between 2% to 12%.

It is important to understand how your business will be assessed to ensure it makes budgetary sense to engage a PEO firm.  If your employee count will remain stable than a fee per employee might make the most sense. However, if you plan to add many new hires, particularly lower wage workers, than the percentage of payroll might be the right choice for you.

Choosing the right PEO 

Several accreditation organizations can help guide you in the selection process.  You can check the National Association of Professional Employer Organizations (NAPEO), which is the national trade association for the PEO industry and Employer Services Assurance Corporation (ESAC), which provides independent verification of more than 40 key factors along with verifying a PEO’s financial solvency.  PEO can also become certified by the IRS if they meet specific criteria.  This certification is called a CPEO. A CPEO is solely liable for the payment of federal employment taxes on wages it pays to worksite employees, and they must provide the IRS with audited financial statements.

Other considerations to keep in mind:

• Do they provide professional references?
• Are their employee benefits sponsored by the PEO? Is the plan fully insured or self-funded?
• Do their insurance carriers provide service in the states where you have workers?
• Do they have expertise in your industry?
• Do they provide EPLI coverage (Employment Practices Liability Insurance)?
• Will they have team members assigned to handle your account, and how many?
• Do they meet all your local and state government requirements?

As a business owner, you have worked hard to build a place where employees can thrive. And, there are many options available to support your HR needs and goals.  From PEOs to HR consultants to payroll companies, the choice you make depends on the level of service and options you and your employees require.

If you are interested in exploring the HR options available to you, please give Kirwan Benefits & Investments a call.  We can work with you to help define your business needs and develop a solution that will work for you now and in the future.