Professional Employer Organization (PEO) Transition

Due to economic and service factors, many of our Silicon Valley start-up clients make the decision to part ways with their Professional Employer Organization (PEO) when they reach 150 – 250 employees.  During the start-up phase, companies decide to work with PEOs to provide their staff instant access to health and retirement benefits, basic HR services, and ensure compliance with a myriad of tax and employment laws. From an initial cost perspective, PEOs make a lot of sense because they are able to pool employees from smaller companies and obtain improved rates on health insurance, workers compensation and state unemployment insurance.

Depreciating Value

Unfortunately, over time the cost and service benefits of joining a PEO begin to diminish.  As start-ups mature into “Young” companies, the co-employer model becomes less attractive as organizations strive to provide improved HR, Benefits and Payroll services and often desire improved technology to manage their workforce.  In general, the top reasons that organizations leave their PEO relationship are as follows:

  1. Lack of cost control
  2. Lack of control over Benefit Plans
  3. Poor HR technology and reporting
  4. Poor HR support and control over employee paperwork
  5. Potential liability for PEO errors
  6. Poor employee experience
  7. Inflexibility around bundled services
  8. Negative outside influence to company culture

While the decision to leave the employee leasing model of a PEO may be structurally clear, the transition planning and timing are more challenging.

Business Case for Leaving A PEO

The fact remains that at scale, PEOs are expensive.  As organizations are considering their options, it is often helpful to create a business case to compare service offerings, technology and cost.  A good places to start is calculating the fees associate with the current PEO.   PEO fees typically range from 10-20% of payroll and benefit costs and benefit renewal costs frequently increase 25-35% annually.  As the company scales, the affordability, convenience and liability mitigation of a PEO model are eclipses by the high fees and service inflexibility.

Determining the optimal time to transition away from the PEO outsource model requires that organizations consider the internal expenditures necessary to manage HR and Payroll operations and the associated compliance requirements.  An internal versus external cost and service comparison should include the following elements:

  • PEO Administrative Costs
  • Payroll Administration Costs
  • Health Insurance Costs
  • Other benefits including STD/LTD, Life, Vision, Dental, COBRA, FSA and or HSA
  • Workers Compensation
  • State Unemployment Insurance
  • Technology costs for HRIS and Payroll services / systems
  • 401k(k) service fees and options
  • Additional membership-based benefits such as credit unions, health clubs and shopping
  • Cost of Compliance

This level of detailed comparison often prompts growing companies to make the decision to leave, however some decide to temporarily remain due to more pressing business priorities. Regardless of the exact timing, all growing organizations that use PEOs need to create a plan of action for gathering requirements, estimating costs and establishing an optimal timeline for transition.

Commitment to Leave PEO

Once the decision to leave the PEO has been confirmed, HR, Benefits and Payroll transition tasks need to be planned and executed in a relatively short time frame.   Some of the key tasks in a transition away from a PEO model include:

  1. Evaluate HR and Payroll requirements
  2. Select HRIS and Payroll solution(s)
  3. Select a competent Employee Brokerage Firm
  4. Finalize decision on transition timeline
  5. Select comparable Benefit plans
  6. Convert Master File data to new HRIS solution
  7. Configure HRIS for Open Enrollment
  8. Execute Open Enrollment and send data to Carriers
  9. Configure Payroll / Time and Attendance System(s)
  10. Establish Third-party Interfaces
  11. Convert Opening Balances
  12. Communicate to Employees and “Go Live” on new systems

A critical success factor in the transition is making sure that the new benefit plans have parity with existing PEO plans.  In certain cases, senior management will need to have their coverage grandfathered in order to maintain consistent coverage with the new Benefit offering.   In many cases, maintaining comparable benefits with the PEO will require additional negotiation with the insurance carriers.  This can be typically handled by a competent Insurance Brokerage firm.

Tax Issues

Managing tax issues during the transition is also an important consideration.  New PEO legislation around clients transition to the “employer of record” in the eyes of the IRS are still pending. Transitioning mid-year provides an interesting dilemma for organizations that want to avoid Employer and Employee tax resets.  Legislator will eventually get around to clarifying the tax reset policies, but for now, Employers will need to make the call.  Because of this potential tax duplication issue, organizations need to carefully consider the timing of their transition.

If you are thinking about transitioning away from your PEO, HBSC can help manage all the essential steps and actually improve HR, Benefits and Payroll capabilities and service.  Clients often leverage our services for managing the whole transition process including transition planning, sourcing HRIS technology, identifying Benefit Brokerage Services, compliance requirements and communications during the transition, For more information on how HBSC can help, please contact us at 800-970-7995 or visit our website at

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