In October we published the first part of this blog, which talked about the definition and hidden costs of PEOs – thank you for reading. We will now continue in part 2 with more hidden costs. There are both pros and cons to PEOs and understanding them is the most important factor. If you truly understand what the plan can offer and the costs associated you will be able to make a better decision for your company.

Let’s continue the blog with three possible hidden costs – risk management, adjusted gross wages, terminating a PEO, and single point of contact.

1. Risk Management

Some PEO’s charge an additional fee if you need their help in managing “your” risk. The work-site employer is liable for any employee-related issues. You may be unaware that you are paying to cover the PEO’s Employer Liability Insurance to protect your company and this is on top of your own Employer Professional Liability. It’s very important that you understand this and know where the costs are coming from. Another very important point is that when a company has a relationship with an insurance company, many customized risk-management functions are provided with your plan free of charge.

2. Adjusted Gross Wages

If you company has a (POP) definition – Section 125 Premium Only Plan, or a flexible Spending Account (PSA), employee deductions under these plans reduce your wage basis for purposes of taxes and workers’ compensation. If you are unaware the IRS’s intent was to provide an incentive to employers to offer these benefits and help them offset their administrative fees through tax reduction. Here is an example:

Gross wages           $2,500.00

Employee Benefits (    300.00)

FSA                            (     200.00)

Adjusted Wages     $2,000.00

Even though taxes and workers comp premiums are typically calculated on adjusted gross wages, a PEO may asses them based on higher gross wages.

3. Terminating a PEO

There are many reasons that someone might leave a PEO, before you get involved in a PEO it’s important to understand the terminating costs. Reasons that a company might leave a PEO model include – realized cost, incompatible benefit offerings, growth of the employer, lack of service, and many others. Here are some barriers to exiting.

- All New Paperwork – after the termination from a PEO model all of your employees will have to fill out new paperwork as new hires and re-enroll in benefits too.

- Two W-2s – your employees will receive two w-2’s for the year, which can be very confusing and frustrating to your employees.

- Taxes – your employees will start FICA and SDI deductions all over again even if they had reached cutoffs while with the PEO.

- Workers Compensation – If you have been with a PEO for a long time, it may be difficult to secure competitive workers comp insurance. Most carriers want to see your premium and loss experience to determine if you’re a good or a poor risk.

4. Single Point of Contact

It seems really easy and good to have one company perform all of your administration. However, if you decide to leave the PEO plan it may be very difficult and require many changes.

These are just a few tips to help you make a better decision for your company. If you have questions you can always contact your benefits consultant for more advice.

References:  www.HRIdeas.com