PEO Insurance: Better Employee Health Option?
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The idea of starting and running your own business can be exciting. New innovations and ideas propelling sales and brand recognition are all part of the fun.
But not everything is fun for small business owners. As health insurance laws changed with the Affordable Care Act, many small and midsized business owners found themselves against the financial ropes, fearing closure due to new demands for employee health care.
As needs grow, solutions evolve. The Professional Employer Organization (PEO) took center stage, offering a better way for small business owners to deal with the health insurance burden (and a few other human resource tasks business leaders typically hate). But is the PEO a better health option for all small and mid-sized businesses?
Changes in Health Insurance Requirements
The ACA changed employee benefits requirements for small businesses. Companies are now mandated to offer health insurance coverage, even if they have less than 50 full-time employees. Obtaining health insurance as a small business means the insurance pool for the group policy is small. For many business owners, this simply means that health insurance is cost-prohibitive to implement.
What A PEO Is
A Professional Employer Organization (PEO) is a company that creates a partnership with smaller companies to serve as the employer of record. The smaller company is an independent business operation seeking to outsource human resources and benefits tasks. Even though each of the small businesses are partners, they are really clients of the PEO.
The PEO uses its Federal Employer Identification Number (FEIN) as the employer of record. It then uses employee leasing to give the workforce back to the smaller company client/partner.
This allows the PEO to have a bigger employee pool to keep costs down for health insurance, retirement benefits administration, and other key administrative tasks. This is known as Co-Employment or Shared Employment.
Why would a company not want control of its employees?
When it comes to a PEO, a small business is usually happy to lease-back their employees to save money and remain in compliance with human resources labor laws. While a small or midsize business could outsource human resources through a Human Resource Outsourcing (HRO) firm to tackle specific HR tasks, the HRO is unable to group employees for group benefits. This is the single biggest reason PEOs have grown so quickly.
Seeking the PEO Solution
Originally, a Professional Employer Organization was used to remove all the human resources tasks from a small business owner yet remain in compliance with the labor code. The PEO took care of payroll, unemployment, human resources processing, workers’ compensation administration, and other HR tasks. Healthcare and benefits administration was often a bonus to help a small business attract and retain better talent.
When the ACA took effect, it wasn’t just small to mid-sized businesses seeking partnerships with a PEO. Startups, independent contractors, and solopreneurs saw the PEO as a way to obtain costly health insurance in a lower group rate scenario. Even with the additional costs for other services packaged into the PEO, these business owners feel the cost is well worth the benefit of affordable healthcare.
Buying Healthcare: The Options
The Hudson Yards Vessel, New York City, NY.
Business owners have a few options when it comes to buying healthcare. These include using a broker, going directly to the market to shop and buy independently, or using the services of a PEO to get coverage.
Buy Independently from Carriers
A small business owner can call health insurance carriers directly and request proposals. This is both time-consuming as well as frustrating for most business owners who often make rash decisions because they are tired of the process. Most small business owners don’t have the insurance acumen to truly digest the options of group health insurance.
Health Insurance Broker
Doctor transporting medical supplies.
A health insurance broker will shop for group plans for you. The broker works on commission for the policies placed. The benefit of using a broker is health insurance brokers shop the policy for business owners, saving time and frustration. They are more experienced in the ins and outs of healthcare policies and coverage options. They work on behalf of business owners, not the insurance carriers. The group policies are limited to the group size in the small business, thus rates are often still considered high.
Partner with a PEO
Partnering with a PEO often means there is more than one health insurance option available to the entire pool of employees the PEO leases out, not just the one partner small business. The PEO often has pools of employees across state lines, making benefits available and affordable to remote workers as well. With a larger pool of employees, costs are usually driven down.
A small business owner may like the idea of partnering with a PEO but feel overwhelmed with the options there as well. This is where a human resources broker is beneficial. Like the health insurance broker, the human resources broker will discuss the needs of the small business to find the right solutions. A broker understands the various human resources tasks every PEO tackles and the rates, thus is best suited to advise the small business owner about the best option.
Will a PEO Always Be Cheaper?
There are instances where a PEO might not provide the best cost-savings options, especially if the driving force is to save on health insurance premiums. Depending on how a small business workforce is distributed both in geography and age, some small businesses may find the premiums higher through a PEO. This is usually the case where a small business has remote workers in regions where the PEO doesn’t have a large employee pool and the insurance costs are naturally higher.
Every small business owner should evaluate where his largest number of employees are and whether the PEO is able to make health insurance affordable for the majority. It may also be favorable if other benefits such as life insurance and disability insurance are offered in the same plan, giving employees a reason to opt into the program.
Don’t assume that the PEO is always the most cost-effective solution. You should evaluate the numbers and make sure it makes sense for you.
Needing More Than Health Insurance
If health insurance is the primary goal of partnering with professional employer services, stop and think about the entire bundle. PEO providers partner with the entire package of HR employee benefits and services. If you have one employee, you should think about the costs across the board.
On the other hand, if you do want or need to outsource human resources tasks anyway, the PEO is often a great choice.
The Professional Employer Organization takes over tasks such as:
Health Insurance Administration
Workers’ Compensation Administration
Unemployment Insurance Claims and Management
Recruiting and Background Checks
Onboarding and Employee Life Cycles (from Hire to Retire)
The compensation that the PEO receives for all of these services is well worth the cost for most companies and small business owners. However, there are instances where it won’t make sense. For example, if the PEO’s workers’ compensation coverage policy is 40 percent more expensive than what a small business can get outside of the PEO, it might not be worth the overall costs.
If the PEO won’t allow you to keep your existing workers’ comp insurance, the cost to have the PEO suddenly goes up and the savings for health insurance needs to be reconsidered. When bundling, look at all the insurance costs including health, group life, workers’ compensation, and employer practices liability insurance costs. The total cost will show the value of the PEO (or raise a flag that it isn’t the best PEO for your industry).
How Much Does a PEO Cost?
It’s important to know what your Administration Fee is, and how you are billed.
There are two standard ways that a PEO charges for Administration per employee fees or percentage of payroll. Consider the overall numbers when contracting with a PEO to make sure you aren’t paying more than you need to for services.
Per-Employee-per-Month (PEPM)
The PEPM fee schedule may seem like standard rates in any presentation made to your company. Brokers will tell you this monthly fee per employee is negotiable at the time of contract signing. There is often a setup fee plus charges for other features. Ask for a fee schedule when signing up to see other potential fees for non-standard work tasks.
Percentage of Payroll (POP)
The Percentage of Payroll (POP) option is the entire payroll that includes wages, state and federal employment taxes, workers’ compensation, and Employer’s Practice Liability Insurance (EPLI). There is also an administrative fee.
PEO Providers to Consider
There are many PEO providers found nationally and regionally. Don’t just shop on price when it comes to finding a PEO. Ask about a fee schedule to see what other fees exist that might not be part of the standard monthly employee processing fee. The following are national PEO providers that are most widely recognized.
Justworks - Overall best pricing among national PEO providers with a simplified PEO software platform making using the system easy for small business owners and employees. Administration cost starts at $99 per employee per month.
TriNet - Easy-to-use PEO software for small businesses with employees across multiple states and companies with remote workers. Administration costs start at $125 per month per employee.
ADP TotalSource - The PEO option for those already familiar with the HRO payroll provider ADP. Costs start around $120 per month per employee, but most companies will pay closer to $200 per month per employee. Their pricing model is a Percentage of Payroll (POP).
Insperity - One of the original PEOs that offers a full suite of services. They bundle all HR services into one solution. Their pricing model bundles everything together, as a Percentage of Payroll (POP).
Other Considerations When Partnering with a PEO
Most PEO providers have their own PEO software platforms. Ask for a demonstration to see how easy it is to use the system. Remember that both business owners and employees need to use the system so it has to be simple and intuitive navigation.
Find out about the customer support options. Call and ask questions to see how easy it is to get answers from the phone support. Do the same with the chat function. Some PEOs actually assigns a representative to the company who will make on-site visits. This is an added support and customer service feature second to none.
At the end of the day, employees still expect the business owner to provide the answers needed. If the PEO system can’t do that and the employee nor the business owner can obtain the right information quickly, the entire platform becomes a hindrance to human relations and kills employee morale.
The Final Choice: PEOs and Health Insurance
There is power in numbers; this notion holds true for small businesses needing health insurance for their owners and employees. The PEO is often the best option for a small to midsize business to get affordable health insurance combined with a lot of other benefits for human resource management.
Regardless of whether the small business is seeking to partner with a PEO just for health insurance or for the full package, shopping for the best rates possible and the best industry fit advised. While there are great national brands for PEOs, some local and regional PEOs are much like credit unions in the banking world – they understand the local market much better and provide better solutions in small markets.
Small business owners should consider using a PEO broker to shop and compare what each professional employer organization offers. Brokers’ services are free since they get paid by the company when the contract is completed. Even though their compensation is based on the closed deal, the broker has a fiduciary responsibility to find the right PEO for the business. It is also in the broker’s best interest for the partnership between the small business and PEO last.
Dinsmore Steele is here to help. Schedule a chat with us to answer your questions about PEOs.
