By Carrie B. Cherveny and Cory Jorbin

Has your company outgrown its Professional Employer Organization (PEO)? It happens.

You may need an HR program that’s more customized for your organization’s needs than a PEO can provide. Your needs for benefits and HR strategies to help you compete for and keep talent may not be so easily met by the PEO’s one-size-fits-all approach. Plus, the PEO may not be as cost effective these days for your expanding payroll or maybe it’s time for the tax credits to start accruing to your company instead of the PEO.

Breaking up does not have to be hard to do, and timing is a big influence over how smoothly the termination goes. Here are key considerations:

Timing and the tax year

If you can terminate the PEO relationship at the start of the calendar year, great. The reboot that would be triggered for certain taxes (like SUTA and FICA) by a mid-year move can be avoided. So can the necessity for multiple W2s and ACA tax forms. Be warned, however, that many PEO contracts contain disincentives for terminations by forcing mid-year departures – by requiring notice of termination within 30 days of the agreement’s effective date, for example. Some PEOs may allow the client month-to-month contract extensions through year-end, but that should be negotiated at the outset. If a mid-calendar-year termination is unavoidable, then aim for the start of the quarter to avoid loading the “quarter to date” tax accruals and simplify the 940 and 941 filing process.

Timing and employee benefits

A PEO exit that can be arranged effective December 31 may occur in the middle of the PEO employee benefits plan year. Beyond inconvenience of two open enrollment periods in the space of 12 months, this poses no major obstacles. But employees who participate in flexible spending accounts need ample notice to take advantage of available funds, and there’s typically a 30-day, post-termination window for submitting receipts.

Mid-year terminations may increase employee expenses for those who have reached their deductible or out-of-pocket maximums. They will may have to start over at $0.00 under the new plan having (your HUB advisor will work with the carrier to negotiate this point). For this reason, if a client company can’t exit the PEO effective December 31, an exit earlier in the year would limit the number of employees impacted by the exit.

Another issue is COBRA participants. Most PEOs require departing clients to cover COBRA participants under their new benefits programs. Some PEOs may impose an additional surcharge for the remaining COBRA participants. Additionally, the master benefits plan may not allow an employee to remain on the PEO’s COBRA if the client is offering a replacement group program.

The history question

Beyond timing, another consideration when exiting a PEO is that your business may not have any workers’ compensation, health insurance, and unemployment claims history. Your organization and that experience all sits inside the PEO’s tax ID number and master insurance programs such as health, workers’ compensation, and ancillary plans. This means that your replacement carriers will not have any historical claims information upon which to base their rates and instead will have to rely on industry and demographic information. This can initially work against a client with positive claims experience but after the first year or two on their own programs, carrier rates should adjust to those more appropriate for the group’s actual claims experience.

PEOs serve a purpose and can be a boon to organizations that need to focus on driving bottom-line growth versus infrastructure. Sufficient due diligence will help bring about the optimal experience, where the PEO exit and the entry are equally smooth.

HUB International’s team is available to work with you on a diverse range of HR needs, from risk management and regulatory compliance to benefits strategy, program design and workplace culture.