In 2020 alone, over 173,000 businesses partnered with a professional employer organization (PEO). This gave them many advantages, including cost savings on employee benefits.
A PEO is, plain and simple, the most comprehensive form of HR outsourcing available. Not only can a PEO administer employee benefits, but they can provide them. PEO health insurance typically offers more for less; you gain access to Fortune 500-level group health insurance for a lower price than you would get on your own.
This raises some critical questions, which are answered below.
1. Why is PEO Health Insurance More Affordable Than Ordinary Health Insurance?
Health insurance is an essential benefit, but it can be prohibitively expensive for small companies and their employees. Small businesses simply do not have enough employees to have the buying and risk management power to get reasonable rates.
The answer is a professional employer organization. Through a mechanism called co-employment, PEOs can add your employees to their own health plan. This increases the size of the risk pool to include all employees of all the PEOs clients, not to mention the PEOs own administrative staff.
Because of this, you gain economies of scale and can afford much better benefits.
2. Does Co-Employment Mean I Lose Control Of My Business?
People who don’t understand co-employment often think it means that they will lose control and that the PEO will be able to make hiring, firing, and promotion decisions for them. This is usually because of confusion between co-employment and employee leasing. In employee leasing, you are sent a worker from a temp agency and may or may not have much control over who shows up.
Co-employment actually splits the employer’s responsibilities. The PEO handles the administrative side of employment, such as running payroll, filing payroll taxes, and handling benefits. Meanwhile, you retain control over day-to-day management, hiring, firing, etc.
Your employees remain yours.
3. What Are the Other Advantages of Co-Employment?
Co-employment also has some other advantages.
For example, many small businesses simply cannot afford to offer a retirement plan. Without one, however, you will never attract the best talent and may even lose talent once they find a position that does come with retirement benefits.
PEOs can co-sponsor your 401(k) plan, which reduces your fiduciary liability and duties, and lowers administrative costs while providing better investment options.
Partnering with a PEO can also significantly reduce your workers’ comp premiums. Smaller companies, especially if they have not been in business for very long, tend to have a high experience modifier rate. Your safety record determines this.
With a PEO, you have a larger risk pool, so a single accident does not increase premiums as much. PEOs can also provide other things that lower premiums, such as optimizing class codes and helping with safety training.
4. What if I Have Employees in Multiple States?
With remote work, you can hire the best talent regardless of where they live. However, having remote employees (or job sites) in multiple states can cause a variety of complexities. You have to worry about labor laws in various states, whether you need an in-state agent, differing laws about workers’ comp, etc.
When working with a PEO, you have access to experts who can help you navigate this. You don’t need to hire a full-time compliance officer but can ask questions of an entire team.
Best-in-class PEOs are registered in all fifty states and can handle multi-state payroll and HR compliance.
5. How Can the ROI of a PEO be 27.2%?
A commonly cited statistic is that the ROI of a PEO is 27.2%. This is higher than any other HR outsourcing method. Payroll processors, in fact, typically have a negative ROI.
This ROI comes from the following:
- Savings on the salaries and benefits of internal HR employees. While a PEO should not replace your internal HR team, working with one can reduce your need to hire additional people.
- Reduced cost of health insurance and other benefits.
- Reduced cost of workers’ compensation insurance.
- Reduced cost of unemployment insurance.
- Reduced spending on other HR expenditures, such as software, training, etc.
A PEO gives a good ROI because it is so comprehensive and because co-employment results in such substantial savings.
6. How Much Does PEO Health Insurance Cost?
The cost of partnering with a PEO varies and is often affected by the size of the PEO.
You can actually get service from a high-quality local PEO for no more than you will pay for a payroll processor. They can still help you with multi-state issues, but you are not paying for, for example, a large office in Seattle or New York.
Choosing a high-quality local PEO will give you the best service for the lowest price. And it will allow you to give your employees quality benefits that attract and retain the best talent.