The 10 Must-Ask Questions When Choosing a PEO

Sep 24, 2020
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A study by noted economists Laurie Bassi and Dan McMurrer revealed that businesses that utilize a PEO grow 7-9 percent faster, have employee turnover that is 23-32 percent lower and are 50 percent less likely to fail than businesses that don't use PEOs.

Given this data, it seems every business should be utilizing a PEO. But before you rush into any PEO arrangement, there are 10 key questions you should ask. We’ll detail these questions and more in order to help you make the best decision for your unique business. But before we get started, let’s briefly go over the basics. 

What is a PEO?

A PEO, or Professional Employer Organization, provides an integrated all-in-one software designed to help reduce the amount of time and money businesses spend on HR including onboarding, time tracking, scheduling, payroll and benefits administration.

How does a PEO work?

PEOs “co-employ” your employees by becoming the “employer of record for tax purposes.” This means the PEO acts as the employer’s HR back-office filing all the necessary tax reporting, while the employer continues to control and direct the activities of its employees. The PEO provides its services as well as added benefits to an employer in exchange for a fee.

The 10 Most Important Questions to Ask When Choosing a PEO

So you’ve decided the time is right to utilize a PEO, but now what? Not all PEOs are created equal and the costs of PEOs can vary exponentially. In order to choose the right PEO for your business, you must become an educated buyer. These 10 questions will help guide you.

  1. Do you employ a salaried or hourly workforce? While over 60% of the US workforce is paid hourly, you may be surprised to learn that most PEOs are built for businesses that only employ salaried workers. Businesses that employ hourly workers are increasingly more complex, so ensure the PEO is able to handle the increased complexities.

  2. Do you have employees in multiple states? Make sure the PEO is able to meet all of the requirements of the states you have employees in inclusive of providing health, dental and life insurance benefits in those states.

  3. What Employer Identification Number (EIN) will be utilized? Typically, a PEO pays employees as well as the employment tax liabilities with funds received from the business and files employment tax returns using its (the PEO’s) EIN (also known as the Federal Employer Identification Number or the Federal Tax Identification Number).

  4. Is the PEO IRS Certified? A PEO that is certified by the IRS (a CPEO) is solely liable for the payment of federal employment taxes on wages it pays to employees. Another benefit of utilizing a CPEO is that at the onset of the relationship, your wage base doesn’t start over meaning any FICA and FUTA taxes previously paid in carry-over to the CPEO so there’s no double payment of these taxes.

  5. What will the PEO do to protect you in a legal dispute? Some PEOs offer Employment Practices Liability Insurance (EPLI) to protect a business against lawsuits dealing with discrimination, harassment, wrongful termination and other issues. This can be a very valuable protection.

  6. Who funds employee group health claims? The group health plan will either be “self-funded” or “fully insured”.  In a self-funded plan, the business, not the insurer, is responsible for paying claims. In contrast, a fully insured plan is written through a group insurance policy whereby the insurer guarantees the payment of claims in accordance with the policy.

  7. Do you offer FSA or HRA options? Some PEOs offer flexible health care options including FSA (Flexible Spending Accounts) and HRA (Health Reimbursement Accounts). In addition to high-quality individual or group plans, FSA and HRA options are typically considered desirable by employees.

  8. What is the Cost? Most PEO pricing models are based on a fee per employee per month (PEPM). And fees for very similar features and services can vary greatly by PEO. Among the top 10 PEOs, costs can range from as low as a small monthly fee and $5 PEPM to as high as $240 PEPM so be sure to shop around.

  9. Are there any additional charges or hidden fees? Many PEOs charge additional fees including start-up or onboarding fees. Among the top 10 PEOs, only two offer free onboarding.

  10. What is the contract length? Contract length can differ wildly. One thing to be aware of when selecting a PEO is that most require annual or multi-year commitments. Among the top 10 PEOs, only three offer month-to-month contracts. Choosing a no-commitment PEO can be a much better option for many businesses.

Asking the right questions up front will allow you to navigate the confusing and complex PEO landscape and help you to find the right PEO for your businesses. In the end, the right PEO will save time, save money, provide greater employee satisfaction and help you to focus on the things that really matter most in your business.