What employers need to know about unplugging from a PEO

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No matter the company size, most employers want to offer their employees a rich suite of benefits. And a professional employer organization — a firm that provides a service under which an employer can outsource employee management tasks — can help provide those benefits to some employers. However, over time, many employers will outgrow a PEO.

But PEOs are complex. They involve a “co-employment” relationship, where employees are merely “leased back,” leaving many employers feeling lost when they’re ready to cut ties.

If you’ve decided that your company has outgrown a PEO and you want to unwind from it, there is a lot to consider. Here’s everything employers need to know about unplugging from the relationship.

COBRA. Technically, employment under a PEO is ending, which means your PEO has to notify employees of their COBRA rights. During your time with a PEO, the company typically holds a fee to cover COBRA costs in case any of your employees elect coverage. However, if you’ve identified other coverage that will begin when your PEO coverage ends, you can request to be reimbursed for that fee after 60-90 days.

Payroll. The last payroll through your PEO may need to be paid by a wire transfer, and the payroll won’t be released until the PEO receives the money. In addition, the PEO may send hard checks, rather than direct depositing your employees’ pay. These is inconvenient, and must be planned for if you’re unplugging.

End date/start date. Your PEO may stop offering administrative and payroll services on a different date than when your insurance coverages stop. You’ll need to consider some amount of overlap — or a very organized transition — to ensure your employees and business remain completely covered.

If your EPLI coverage ends and you have a pending claim, your legal defense benefit may not cover the claim.

State Unemployment Tax Act (SUTA) filings. Employers will have to file new SUTA paperwork for the state they’re doing business in. When these changes to SUTA and other employer-paid taxes are made it could result in a tax bill — moving employees from a PEO to your own federal employer identification number effectively resets your taxes for the year.

Employee-related changes. Some of these changes will be more noticeable than others to employees. In addition to needing to elect new benefits, employees may also experience a blackout period on their 401(k) plans where they can’t make changes (employers may also have to pay additional 401(k) fees). Your employees may also need to fill out the typical new employee paperwork like I-9s and W-4s again. In addition, employees will receive two W-2s for the year you make the switch.

You also may need to adjust your employee handbook and have employees agree to it again if your old handbook references a co-employment relationship with your PEO. As with any changes that will affect your employees, you should communicate early and often so everyone knows what to expect.

It isn’t uncommon to need to unplug from a PEO. When it comes time to vary your employee benefits offering or you’ve outgrown it, you should know you won’t be the first to have to do so. But unwinding from a PEO relationship does take a significant amount of planning and organization, and a keen understanding of exactly what you might endure during the transition period.

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Workplace management Workforce management Benefit management Benefit strategies Employee communications