We’d like to introduce you to Bob. Bob is a small business owner. When Bob started his business, he was thinking 1-2 years ahead. All his plans were to meet certain software development benchmarks, gain a certain number of new clients, and hit revenue targets. This was the motor for his passion for the business, and it drove his team to success in 2 years. They kept things lean and simple. Until they couldn’t. They used a PEO for internal HR stuff. They grew to the point of forming their own HR team and needed to initiate a PEO exit. That was when Bob’s employee issues unraveled. And despite creating a great company culture, some employees left (one of them a key employee) because they felt fleeced by Bob and the company.
What happened? The company didn’t realize what was involved in getting OUT of their PEO.
When the trouble starts with a PEO exit
Everything was going well with the PEO that Bob’s company used. A PEO or Professional Employer Organization essentially co-employs your employees with your company. This way you can lock in good health insurance rates, and streamline some of the HR dashboard items you need to get started. No two PEOs are exactly alike, but in general they strive to offer more than a small young company would ever need. It’s a way of “shock and awe” about all that HR could entail, and then just “leave it to us for this monthly price” type of deal.
The first sign of problems with Bob’s team and the PEO model began when one of his employees Janice could not get approved by a bank for buying a home. The simple reason: Janice’s employer was not who she said it was. This failed through mortgage underwriting when she needed to present past paystubs. And it wasn’t possible for the PEO to just change the company name on the paystub. A fixable problem, but certainly something that unnecessarily angered Janice.
Around the same time, Bob’s company was large enough to create its own HR position. But wiggling free from the PEO was nothing like they expected. It ended costing Bob’s company a lot more than they bargained for. We take (professional) pity on companies going through this dark valley. So we’ve listed 5 things that will set you free. And keep your employees motivated.
1. Communicate about your medical/dental insurance deductible reset
Remember, in a co-employer relationship with a PEO, it is the PEO who holds the relationship with the insurance company. When you go out on your own, you lose a lot of things, including the deductible period, aka reset date. Different PEOs do this differently. Some have a standard reset date for everyone (Dec 31 or whenever). Others allow the company to set their own reset date. Make sure that you time your PEO exit with the reset date you target. And be ready for the PEO to tell you that you need 3 months to terminate your agreement, or else yada yada yada.
It is absolutely essential to communicate this reset date to your employees, who often do their best to time maxing their deductibles to get optimal care and coverage. If you fail to do this, you may get at least a few (very) angry employees who will have potentially lost thousands due to your poor communication and their inability to time it.
2. Lock in COBRA with your new coverage
We’ve seen this happen before: the PEO tells the exiting company that there are huge fees to manage COBRA accounts. And unfortunately, you often agreed to those fees in your initial contract with the PEO. Try to avoid these costs. See if your new medical insurance carrier will take your COBRA participants into their plans when you start. This could save you a pretty penny, as well as allow you to truly sever ties with the PEO without paying an arm and a leg.
3. Encourage employees to use up their FSA funds
Many companies overlook this simple fact when leaving a PEO: the FSA funds stay with the employer, i.e. the PEO. As an employer, there is likely no way around this except to inform your employees ahead of time. Be sure to give employees ample opportunity to exhaust their FSA funds before they can’t access them anymore. We’ve seen some PEOs go so far as to refuse processing claims even before the termination date. This can cause unnecessary aggravation with employees, giving the company new challenges to deal with (thank you, PEO!).
4. Ensure federal tax withholdings are counted
Some PEOs do not disclose that they are not IRS Certified PEOs. This means they are not registered with the IRS. If your company tries to exit a non-Certified PEO mid-year, there is the danger that the amounts which employees paid into their Medicare and Social Security taxes are reset mid-year. That means, repayment will be required (yowzers). If you plan to leave mid-year, make sure it’s a Certified PEO. Otherwise, you’ll have some unhappy campers among your employees. Probably all of them.
5. Find out your State Unemployment Tax Withholdings situation
If you’re in a PEO SUTA state or Employer (pass through) SUTA state, the tax restarts when you exit the PEO. The amount your company pays is based on employees’ wages and other factors. Look into these carefully with an experienced HR firm or accountant. The rules on tax restarts vary by state creating very challenging calculations that are rarely discussed or disclosed when you leave a PEO mid-year. Don’t pay twice – make sure you’ve done your homework before you make your way to the exit.
Don’t overpay or double pay with a PEO exit
We wish that a lot of companies who opted for a PEO had spoken with us or another HR firm to talk to them about these challenges. Hence, this post (and a previous one for businesses considering a PEO). We like this one, too, about the myths of PEOs. Sure, many things are great with a PEO. HR documents and trainings are easily accessible. Payroll, bonuses, and benefits can run smoothly. Withholdings are managed. But not all things are great with a PEO. And this becomes evident when you want to leave the relationship. The damage is already done when you realize things like the PEO couldn’t care less for your employees when they keep FSA funds or deny/indeterminately delay processing claims. Your employees will turn to you and your new HR person to help them. But you are bound by a PEO contract.
We always say: pay for what you need, not what you don’t. Some companies are willing to pay a little more with a PEO in the perceived added benefit of getting hundreds of resources, which in our experience they will most likely never use. In the end, a PEO inevitably becomes too expensive for a growing company and you’re still left with needing an internal resource to manage and interact with the PEO. And then when trying to get out, you find out how much you have to pay, or even double-pay when dealing with these types of organizations.
Send us an email at firstname.lastname@example.org and can we answer all of your questions about how to ease into and out of the PEO relationship, and how to optimize your resources to have a smooth HR function and a happy team of employees. After all, you (like Bob) have put so much work into the product, services, and revenue to make your team successful. Why squander it on the backend with an unhappy team of employees?