Exiting a PEO Relationship - Your PEO Exit Strategy

When your organization entered into a contract with a professional employer organization (PEO), it was likely looking to outsource a variety of human resources functions and save valuable resources. However, many companies will eventually decide it’s time to end their relationship with their PEO. Doing so can be tricky, but the Benefits Experts at AEIS have you covered on your way to forming your PEO exit strategy. Read on for a comprehensive guide to exiting a PEO relationship.

Reasons for Exiting a PEO Relationship:

• A need for greater control of your own company: As your organization grows, employers in a PEO also grow to a certain size, it eventually becomes more economical to hire staff to internally handle the HR and admin functions that the PEO provides than to bear the cost of outsourcing to the PEO. If that tradeoff no longer feels valuable to a business, the time may be right for exiting the PEO relationship.
• The desire to choose your partners: Often, PEOs have total control over what businesses you’ll partner with for your health benefits and workers’ compensation needs, among other things. Not only can you not be sure you’re being paired with the perfect vendor, but you also lack a complete picture of how those partners are interacting with your business. Having the ability to choose how you work becomes more critical as an organization grows.
• You’re not getting enough to justify steep PEO fees. PEO fees can be steep and can easily cost over $1,000 annually per employee. As your organization grows and changes, it may make more sense to hire Human Resources or Finance professionals internally. Hiring your own HR professionals, for example, can ensure new employees receive company-specific onboarding and receive the unique ongoing support they need.
• Rising costs of PEO-facilitated health care relationships. The overall costs of health insurance have risen in recent years. PEO’s have to actively manage the collective risk of all the members in their health insurance risk pools (i.e. including your employees), this means that employers in a PEO can see drastic cost increases at their health insurance renewals if their employees experience catastrophic medical claims. It’s not uncommon for some PEO’s to present 50%+ renewal increases to clients on their health insurance when these catastrophic claims happen. These factors mean while PEO’s can help some employers save money on health insurance, there are no shortage of instances in which the costs can exceed what is available by simply going to the small group market.

Items to Consider Before Exiting a PEO Relationship:

Key Items to Consider:

• Timing and Tax Consequences. If you’re exiting your PEO relationship mid-year, there are certain tax consequences you should be aware of. The government will count all your employees as “new” employees when you exit the relationship mid-year, for example. This means FICA and FUTA taxes for each worker’s wages for the year will be nontransferable, and the wage base will restart at the time of transfer. This will result in a double-taxation situation. Employees will still be able to reconcile excess payroll taxes on their own tax returns.
• COBRA Liability and Administration. You likely know that your PEO charges fees to manage your former employees who receive COBRA benefits. Employees can continue to receive COBRA benefits through your PEO during their maximum coverage period. You could be responsible for ACA reporting after leaving your PEO, including finding a partner to file your Form 1094-Cs and Form 1095-Cs.
• Two W-2s at Year End.
• Termination Requirements.
• PEO Termination Notification.
• FSA / Transit Benefit (spend-down period).
• 1-9s and W-4s.

Services that will Need to be Replaced:

• Payroll / HRIS: It’s crucial to have your new payroll system completely in place before you exit your PEO relationship. Doing so will prevent the interruption of paychecks to your employees.
• Human resources services: Of course, you’ll need to delegate any services that were performed by your PEO to existing HR professionals within your company or hire and train new employees to cover these tasks. After your exit from the PEO relationship, you may also want to update your policies and procedures, including your employee handbook.
• Legal and compliance services, including compliance with FMLA and FLSA.
• Technology, i.e., online enrollment and eligibility solutions. Leaving the PEO relationship means losing their integrated technology solutions, but it doesn’t mean you won’t be able to replace and even improve upon their systems with partners that appreciate your unique needs.

Benefits that will Need to be Replaced:

• Workers’ compensation / EPL Insurance: Keep in mind that it’s critical that your organization does not experience a lapse in workers’ compensation insurance, so as to avoid government fines and penalties. Coverage must therefore be in place before you exit your PEO relationship.
• Medical
• Dental
• Vision
• Life
• Disability
• EAP
• FSA
• Transit Plan
• 401(k)

What to Request from your PEO before Exiting the Relationship:

• PEO Invoice / chargeback Invoice
• Benefits register
• Plan summaries / benefits-at-a-glance
• Employee census
• Carrier history for the last 5 years 
• Large claim information in excess of $25,000
• Completed questionnaires, if placing with UHC or CalChoice
• Current rates and renewal rates
• Employer contributions for both employees and dependents

Implementation Requirements:

• Most recent chargeback invoice (in lieu of DE9C, when enrolling fewer than 51 employees)
• PEO termination letter
• Employer application
• Employee applications and waivers
• Binder check

What to Do if You Have More Questions about Exiting Your PEO Relationship: 

At AEIS, our top priority is always to pair you with the best solutions based on your unique and current business needs. Whether you are looking to transition from one PEO to another or leave the PEO model entirely, we are ready to offer assistance and better outcomes. From helping you compare and contrast each of the PEOs you can choose, to walking you through the transition or exit process, to helping you shop the market for your new health insurance and payroll/HRIS systems, AEIS has the resources and experience necessary to facilitate a smooth transition. We can provide you and your business with a tailored list of options and rates to ensure you are making the most informed decisions.

Considering breaking off your contractual obligations to your current PEO? Your company could benefit from a free phone consultation with the Benefits and Compliance Experts at AEIS. Give AEIS a call at (650) 348-6234, contact AEIS by email at team@aeisadvisors.com, or fill out a contact form.