Why and how is it perceived to be difficult to leave a PEO? Does anyone have any experience with it or perspective?
My guess would be that the PEO is doing everything for you so if you left, you would not just be changing systems, you would have develop systems, hire and train staff. If you had an HRIS system, you would have procedures and trained staff that would be able to function during a change in software.
Julie Freer, CPA
I posted a blog on this site - "A PEO is not a set it and forget it Process"
The main point is that if you cede total control, de-linking is very difficult.
In terms of difficulty related to employee benefits. At times it is difficult for the insurance carriers to provide accurate quotes, or quotes at all. While your in a PEO your claims are pooled with the other members, thus when trying to leave insurance carriers have nothing to underwrite your group off of. In California some carriers have made the process easier but over all the first marketing for medical insurance coming out of a PEO is typically difficult.
It's really not that difficult to leave a PEO. Just focus on the key areas:
Payroll: There are plenty of qualified payroll vendors on the market, ranging from the enterprise level like ADP to do-it-yourself versions like Intuit Online Payroll, with a range of options in-between. If you have a large or complex payroll, then you should probably go with an established vendor. I would also recommend asking them to run a parallel payroll before you terminate with the PEO so you can ensure accuracy before you make the transition. The key issue to focus on is making a smooth transition for the employees and the first step is making sure that the first paycheck is accurate.
Taxes: Depending upon your state and how long you've been with the PEO, you may need to reinstate your state unemployment tax (SUTA) account. Some states track your company's claims history even while your with a PEO so that transition is easy. Other states may require you to restart your tax rate or even go back to the base rate until you can build up a claim history. FICA and FUTA taxes are relatively easy to restart. The potential curveball is that if you change at anytime after 1/1, then you'll have to restart the payroll tax limits. This can adversely impact highly comped employees.
Benefits: Getting a group benefits quote is fairly easy, even post ACA. A good broker should be able to help you to get a quote that matches the benefits menu with the PEO. You'll need to balance what benefits menu you can afford and what your employees demand. Depending on your employee demographics, you may find that your can get a comparable quote or you may have to pay more. Your broker should be able to help you balance these issues.
Workers Comp: Getting a workers comp quote is easy enough. Your PEO can provide a 3 year loss history. Most WC carriers will recognize this loss history in lieu of an individual policy. For non-risky class codes, like clerical, it's an easy transition. If you're in a riskier class code, you may need to undergo a safety audit or pay a higher downpayment to initiate a new policy. Depends upon your risk profile and the WC carrier.
HRMS: If you have an internal HR staff, they will need an HR management system to track HR functions. There are plenty on the market but they range from simple to hugely complex. It really depends on your needs. HR technology has made huge advances recently so you can probably find a good solution. Your PEO may be willing to help you port over the employee information into your new HRMS. Or not. Really depends on the PEO and how capable and willing they are to help you through the transition.
Good luck. If you need any help, shoot me a PM. I'm happy to answer your questions or assist as I'm able.
Scott Cadora, VP
Point of clarification regarding payroll taxes - while it is true that when switching "employers" mid-year, employees restart withholdings for social security purposes and employees with earnings above the cap (currently $117,000) will have excess withholdings on the year, that excess can be recovered easily when filing their tax returns. The adverse effect for the employee is therefore limited to a cashflow issue. On the other hand, the excess employer-match on those social security dollars is NOT recoverable by the company and is a real extra expense to the company.
This is really helpful and I really appreciate your input. Thanks!
@Edward: many thanks for that. I didn't know that the employer would have to pay excess payroll taxes during that year and cannot recover them? That's really strange and unfair. Wow. Thanks for that.
Unfair indeed -- we have two separate companies with identical ownership each processing their own payrolls but because we don't use a single common paymaster, we would pay extra taxes if we transfer employees mid-year even between these sister companies. As long as changes are made at year-end, there is no negative consequence from this perspective.
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