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How to Exit a PEO: A Guide for Businesses

Monday, June 17, 2024
How to Exit a PEO: A Guide for Businesses

Exiting a Professional Employer Organization (PEO) can be a significant milestone for businesses experiencing growth and looking to regain control over their operations. The process can be complex, but you can transition smoothly with careful planning and the right resources. Based on insights from a recent webinar hosted by the Horton Group, this article provides a comprehensive guide to understanding PEOs, recognizing when it’s time to exit, and executing a successful transition.

What is a PEO?

A PEO is an organization that provides comprehensive HR services to small and medium-sized businesses by becoming the employer of record for the company’s employees. This co-employment model allows PEOs to handle tasks such as payroll, benefits administration, regulatory compliance, and more. PEOs are particularly beneficial for businesses that lack the internal infrastructure to manage these functions, often resulting in decreased turnover and accelerated growth.

Types of PEOs

There are two main types of PEOs:

  • National PEOs: These require the client to remit payments and are responsible for ensuring that tax payments are made timely. The client is held liable if the PEO fails to remit these payments.
  • Certified PEOs: The IRS recognizes certified PEOs, who are responsible for paying federal employment taxes on behalf of their clients, as detailed in IRS Form 8973.

Disadvantages of PEOs

While PEOs offer many advantages, there are several drawbacks that might prompt businesses to consider exiting:

  • Cost: PEOs typically charge a percentage of your payroll, ranging from 2% to 10%. This can become expensive as your company grows, especially if you have highly compensated employees.
  • Limited Data Access: Clients often have limited access to their own employee data, which can be frustrating and hinder business operations.
  • Lack of Control: When it comes to handling claims and compliance, businesses are often at the mercy of the PEO’s policies and procedures.
  • Loss of Tax Credits: Businesses may lose out on significant tax credits, such as the Work Opportunity Tax Credit, which can be worth up to $9,000 per employee.
  • Administrative Fees: As your business grows, the administrative fees charged by PEOs can quickly absorb any initial savings, making the arrangement less cost-effective.

Indicators That You’ve Outgrown Your PEO

Here are some signs that it might be time to exit your PEO:

  • Desire for Control: If you want to regain control over your HR functions and data.
  • Growth: If your company is expanding and the costs of the PEO arrangement are increasing disproportionately.
  • Cost Management: If you’re looking to cut costs or achieve better value without compromising on services.
  • Technology Needs: If your PEO’s technology is outdated and not meeting your needs for human capital management.

Steps to Properly Exit a PEO

  1. Evaluate Your Needs: Determine your total number of employees and assess your requirements for benefits administration, compliance, and technology.
  2. Review the PEO Contract: Examine the terms of your PEO contract, including any penalties for early termination and the services provided.
  3. Plan Design and Compliance: Work with a licensed insurance consultant to explore different plan designs, compliance requirements, and the best solutions for your business.
  4. Set Up COBRA Administration: Ensure you have a COBRA administration plan in place to handle employee benefits continuation post-PEO.
  5. Select New Providers: Choose new providers for payroll, benefits administration, and HR functions that offer better value and service.
  6. Technology Integration: Ensure seamless integration of your new systems with existing technologies to maintain efficiency and productivity.
  7. Financial Impact Analysis: Conduct a detailed analysis to compare the costs and benefits of exiting the PEO versus staying.

Taking the Leap: Your Path to Independence

Exiting a PEO can provide your business with greater control, cost savings, and access to better resources. However, it’s crucial to approach this transition with a well-thought-out plan. You can ensure a smooth and successful transition by evaluating your needs, understanding the limitations of your current PEO arrangement, and working with experienced consultants.

For more personalized advice and a complimentary PEO analysis, connect with the Horton Group. They offer expert guidance to help you navigate the complexities of exiting a PEO and optimizing your HR functions.

Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.