Defining a Professional Employer Organization
Advantages of PEO Services for the Business Owner
PEO Compared to Outsourcing Payroll
Professional Employer Organization (PEO) FAQ’s
Service Department Costs
How to Select a PEO
Creating a successful partnership with a Professional Employer Organization (PEO), for the co-employment of your employees, requires that the Business Owner apply the same standards used when selecting a CPA, an Agent of Record, an Attorney or any other trusted partner/advisor/consultant. Now, let’s look how to select a PEO.
First, assess your business to determine your Payroll, Employee Benefits, Human Resources and Safety and Risk Management needs. Then, decide whether to build internal capacity or execute a Customer Service Agreement (CSA) with a Texas Licensed PEO for that capacity. After, confirm that the PEO Vendor is Licensed to conduct business in the State of Texas. Contact the Texas Department of Licensing and Regulation to confirm licensing. Reach them either by calling 800.803.9202 or visiting (www.license.state.tx.us). When you visit the website, (right side of page) CLICK on “Search Licensees by License Type”. Then CLICK “Inquire by License Type”. Then SELECT “Staff Leasing Services.” After that, SELECT “Inquire by Name”. Finally, type in the Company Name, and then CLICK “Search”.
Select a Certified PEO Vendor
Confirm that the PEO Vendor is certified through the Employer Service Assurance Corporation (ESAC). In addition, they provide independent professional verification that a PEO has met the highest ethical, financial and operational industry standards through comprehensive certification and ongoing monitoring. For more information, visit www.esacorp.org then CLICK on “Verify” then type in “PEO Name” then type in “City” then SELECT “State” then CLICK “Submit”.
Verify that the PEO Vendor is certified through the Certification Institute. It provides an independent professional verification that a PEO’s risk management program is meeting proven insurance industry risk management best practices to control WC insurance losses. Certification provides WC insurance companies with ongoing assurance that a PEO is in fact implementing industry best practices in a consistent and effective manner. Visit (www.certificationinstitute.org) then “CLICK Go Workers’ Compensation Risk Management Certification” then CLICK (Top Tab) Certified Companies” then type in “PEO Name” then type in “City” then SELECT “State” then CLICK “Search”.
Verify Your PEO Vendor
First, verify the length of time that the PEO Vendor has been in business.
Then, verify that the PEO Vendor possess the Financial Strength to deliver the contracted services and meet the financial requirements. (Ask for a Copy the PEO’s Dun and Bradstreet Financial Rating). (Note: An ESAC Certified PEO is Audited Annually and is Financially Assured with a $1,000,000 Surety Bond plus an Excess Surety Bond of $5,000,000 for Key Services.)
When you have verified the above, verify that the PEO Vendor possess the Workers’ Compensation and General Liability Insurances (Copies of Certificate of Insurances) necessary fulfill the contractual obligations associated with a PEO Arrangement.
Verify how the PEO Vendor’s Employee Benefits Plan is tailored. Is the Employee Benefits Plan an all or nothing proposition? Or after a cost/benefit comparison has been completed? If the current plan is more cost effective to remain in force, then will the PEO accommodate such an arrangement? Will the Employee Benefits Plan fit the needs of Your employees?
Verify how the PEO Vendor funds Employee Benefits. Is the PEO fully-insured, self-funded, or partially self-funded? (Note: In the State of Texas it is unlawful for a PEO to self-fund or partially self-fund a Medical Health Plan) Who is the third-party administrator (TPA) or carrier? Finally, is their TPA or carrier authorized to do business in the State of Texas?
Then, verify how the PEO Vendor will Collect Premiums for Employee Benefits. Do they collect the premiums weekly (as-you-go) or monthly (in advance)?
Review PEO Customer Service Agreement
Review the PEO Customer Service Agreement (CSA) carefully. Construct the CSA to comply with the requirements of the Texas Staff Leasing Services Act. It is a “Service Agreement” titled “… / Client Leasing Agreement (Texas Employees). Are the respective parties’ responsibilities and liabilities clearly stated? What guarantees are provided? Also, what is the Contract Period and Extension(s)? What provision(s) permit cancellation or termination of the CSA?
Request a Personal Presentation by the PEO Vendor. Sales brochures and fancy proposals are easy to print; however, One-on-One contact reinforces credibility.
Key Words for the Business Owner’s Consideration
Look at the following key words for the business owner’s consideration:
“Responsible for…” – means that the PEO Vendor is the lead and assumes all cost and liability associated with the action.
“Assist with…” – means that the Business Owner is the lead and assumes all cost and liability associated with the action. The PEO Vendor’s role is to help and support the Business Owner in that action.
“Advise on…” – means that the Business Owner is the lead and assumes all cost and liability associated with the action. The PEO Vendor’s role is to recommend and suggest to the Business Owner regarding that action.
“Consulting…” – means that the Business Owner is the lead and assumes all cost and liability associated with the action. The PEO Vendor’s role is to provide expert advice or information to the Business Owner regarding that action.
Identifying the Business Owner’s Hard Dollar Cost
For purposes of this Guide, the Business Owner’s Hard Dollar Costs are defined as fully allocated costs for an activity(s) that include the following:
- All direct and indirect personnel
- Payroll (Federal Insurance Contributions Act Social Security and Medicare (FICA)
- Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA))
- Insurance (Workers’ Compensation (WC) Premium and Annual Audit)
- Materials and supplies
- Capital depreciation
- Maintenance and repairs
- General / administrative overhead
Pricing Formula for PEO Services
The Cost Elements typical to PEO Service Pricing includes the following formula:
FICA + FUTA + SUTA + WC Premium (Pay-As-You-Go) + Administrative Fee = Billing Rate.
Variables That Affect PEO Pricing
The Variables that affect PEO Pricing are: (1) the Annual Amount of Payroll as a Ratio to the Number of Employees, (2) the NCCI Experience Modifier Rate, (3) the Risk associated with the Business Type, and (4) the SUTA Rate based on the Annual Employee Turnover and Unemployment Claims Paid.
Therefore, PEO pricing is usually related to gross payroll, and is a “Billing Rate” stated as a cost per $100 of gross payroll. Most PEO’s combine all employee related costs (Bundled Price) into a factor for each workers’ compensation class code, to allow for a single payment, which is simple and predicable for the Business Owner.
Once the “Billing Rate” has been established, the cost per $100 of payroll remains fixed, excluding any statutory increase in the minimum wage, employees taxes, sales tax or workers’ compensation rates. Keep in mind, a PEO Vendor may or may not charge a one-time “Set-Up Fee”.
In addition, a PEO Vendor may or may not require a one-time (one pay period) payroll, payroll taxes, workers’ compensation, and employee benefits premium Deposit, prior to the processing of the First Payroll.
Employee Benefits – Health – Welfare – Retirement
The information in this chapter has been written to provide the basic information about Group Health Insurance Plans, Welfare Plans (Ancillary Products), 401(k) Retirement Plans, and how they are typically implemented in a Co-Employer Arrangement.
Additionally, to minimize any risk to the Business Owner, offering benefits to Your Employees must be done correctly and in compliance with IRS/DOL/ERISA regulatory guidelines.
PEO Vendors bring to the table a selection of plans that will have different requirements for participation, different underwriting and enrollment procedures, and different premium payment timelines.
With no consideration of a cost/benefit comparison of the current Benefit Plan(s) in-force and available to Your Employees; PEO Vendors whom require that their Group Health Insurance Plan, and/or their Welfare Plans (Ancillary Products), and/or their 401(k) Retirement Plans be adopted as the only option(s) available to the Your Employees; are generally more interested in establishing an “Exit Barrier” to the PEO Arrangement.
Group Health Insurance Plan – Requirements for Participation
Health Carriers will set a specific minimum percentage of the monthly premium, for Employee Only, to be paid by the “Work Site” Employer (Business Owner), with the balance of the monthly premium as the responsibility of the employee.
Additionally, a minimum percentage of eligible employees must participate in the plan. Typically, these percentages will be 50% of the monthly premium, for Employee Only, to be paid by the “Work Site” Employer (Business Owner) with 75% of the eligible employees participating.
Note: The 75% participation requirement does not include employees who already participating in a group or personal health plan. For example, they are covered on their spouse’s medical plan. Also non-eligible are employees or employee dependents that are on a Social Security disability.
Group Health Insurance Plan – Underwriting and Enrollment Procedures
Medical Election Form
First, the PEO Vendor should provide the Business Owner with a Medical Election Form. The form acts as documentation of the desire to enroll the Your Employees in a Group Health Insurance Plan. It also provides acknowledgement, by the Business Owner, of the participation and eligibility requirements of the Group Health Insurance Plan being offered.
Medical Consensus Form
Then, all the employees who will be participating in the plan must complete a Medical Census Form. Then, they review these forms to provide a quote of monthly premiums for a Group Health Insurance Plan. The PEO quotes these premiums based on rates associated with the type of coverage (80/60, 90/70, etc.), the optional yearly deductible, the geographic region, and the type of prescription drug coverage selected.
Group Health Insurance Plan Application
Then, the employees then fill out the Group Health Insurance Plan Application, which includes the employee, spouse and dependents information. Those employees not participating will fill out the portion of the application where they decline coverage.
Cafeteria 125 Plan
Finally, upon completion of the application, employees may be given, depending upon the PEO Vendor, an opportunity to enroll in a Cafeteria 125 Plan. They can select or decline this option but they must sign documentation verifying their decision.
As the “Work Site” Employer (Business Owner) offering benefits to Your Employees, there is an absolute obligation to meet Internal Revenue Service (IRS), U.S. Department of Labor (DOL) and Employee Retirement Income Security Act (ERISA) compliance requirements in presenting and offering these benefits.
Group Health Insurance Plan – Premium Payment Timelines
Typical to the PEO marketplace are two (2) ways of payment for insurance product premiums: Payment (1) is referred to as “Pay As You Go” which is payment by pay period for effective coverage only for the next pay period, and Payment (2) is referred to as “Monthly Pay In Advance” which is payment for effective coverage for the month following the last pay period.
Because Payment (1) “Pay As You Go” does not provide for coverage beyond one pay period, this method for collecting premium payment is often used, by a PEO Vendor, as an “Exit Barrier” Strategy. Meaning, with a Payment (1) premium schedule, terminating the CSA may have an immediate impact on the continuation of Your Employees’ insurance coverage.
However, Payment (2) “Monthly Pay In Advance” does provide for coverage until the end of the month for which premiums have been paid.
Welfare Plan (Ancillary Products) – Requirements for Participation
Welfare Plans (Ancillary Products) generally including: Dental Plan, Vision Plan, Short-Term Disability Insurance, Long-Term Disability Insurance, Life Insurance, Accident Insurance, Cancer Insurance, Critical Illness Insurance, Hospital Confinement Insurance, Term Life Insurance.
Underwriting and Enrollment Procedures
The Insurance Representatives generally conduct Underwriting and Enrollment for Ancillary Products on-site (and not the PEO Vendor).
Insurance Representatives use Applications/Enrollment documents to create a data file on each policyholder. They use this data to print individual insurance cards, provider listings and to provide a mailing address for sending the employee a copy of the policy.
Welfare Plan (Ancillary Products) – Premium Payment Timelines
Normally, premium payments are “Monthly Pay In Advance” which is payment for effective coverage for the month following the last pay period.
401(k) Plan Overview
Through the PEO Vendor, the Business Owner, as the co-employer, may choose to offer a 401(k) Plan to Your Employees. This type of retirement vehicle is a single multiple plan designed by legal experts to conform to IRS regulations that address plans in a PEO/Client relationship/contract. Essentially, the plan is set as a single plan with the PEO Vendor as the fiduciary and with provisions for multiple participating co-employers. Furthermore as the co-employer, the Business Owner adopts the plan through an adoption agreement to make it available for their employees to participate. The PEO Vendor’s Third Party Administrator (TPA)’s responsibility includes the following:
- All non-discrimination testing
- Government filings
- Other administrative actions
During the adoption process, the Business Owner has the option to choose to provide or not provide some level of employer “matching” contribution. Likewise, the Business Owner determines what the eligibility criteria will be.
The following includes information about payment requirements.
Payment of Employment Taxes and Wages
In addition to FICA, FUTA, SUTA, and WC Premium. by contract, the PEO Vendor assumes the responsibilities for payment of wages, salary, or other compensation made on a recurring basis to Your Employees.
The provisions or the Texas Staff Leasing Services Act guides the entire process.
Payment for PEO Services
Prior to the “Pay Date” the PEO Vendor will Invoice the Business Owner at the contracted “Billing Rate” per $100 of Processed Payroll plus Insurance Premiums, plus 401(k) Contributions, plus Miscellaneous Deductions, and any additional charges for such services as Pre-Employment Background Checks, etc.
Prior to Payroll Processing, the Business Owner reconciles and approves the Invoice Amount.
Then before the actual payroll processing begins, the Business Owner will simultaneously transmit approval and payment of the Invoice Amount to the PEO Vendor.
Upon receipt of payment, the PEO Vendor processes payroll and directs payment to the individual “co-employees”.
What PEO Vendors Need to Know
To assist a PEO Vendor to properly prepare a Request for Service Proposal, the following information is necessary:
1. Identify if a PEO Arrangement is currently in effect.
2. Please provide the Company Name of the current PEO.
3. Please provide the current “employer of record’s” Federal ID #.
4. Please provide the current “employer of record’s” SUTA Rate.
5. Please provide a copy of the most recent Payroll Report.
6. Please provide the number of Full-Time and Part-Time employees.
7. Identify the current Payroll Frequency.
8. Please provide the current Workers’ Compensation Wage information: WC Class Code, Number of Employees in that Code and the Annual Wages Paid in that Code.
9. Please provide a copy of the Workers’ Compensation Policy Declaration Page.
10. Please provide a copy of the current “employer of record’s” Workers’ Compensation Loss Runs for the Previous Three (3) Years.
11. Please provide a copy of the OSHA Logs for the previous 3 years.
12. Please provide a copy of the General Liability Declaration Page.
13. Please provide a copy of the Schedule of Benefits for the current Health Care Plan.
14. Identify the name of the current “employer of record’s” current Health Plan Provider.
15. Provide the employee census (DO NOT include NAMES or ANY PERSONAL IDENTIFIERS) for the current “employer of record’s” current Health Care Plan.
What Questions to Ask the PEO Vendor
If you want to assure a low risk factor for the Business Owner and to evaluate a Request for Service Proposal, then request each PEO Vendor to provide the following information:
- State and address any and all “Set-Up Fees”.
- State and address any and all services included in the “Billing Rate”.
- The Staff Transition Process.
- Their Communication Method(s) used when interacting with Your and Your “co-employees”.
- The Customer Service Model.
- Description of theirPayroll Services. (Input Methods, Payment Methods and Reporting) and (Responsible for…, Assist with…).
- Description of their Employee Benefits Plans. (Health, Welfare and Retirement).
- How they fund Employee Benefits.
- How they pay Employee Benefits. (“Pay As You Go” or “Monthly Pay In Advance”).
- Describe their Human Resources Services. (Responsible for…, Assist with…, Advise on…, and Consulting…).
- Describe their Safety and Risk Services. (Responsible for…, Assist with…, Advise on…, and Consulting…).
- Provide copies of their Certificate of Insurance for both Workers’ Compensation and General Liability.
- Describe their Background and History. (Length of Time in the PEO Business).
- Describe their Qualifications. (License, NAPEO, ESAC, Certification Institute, Principles and Key Staff).
- At the Personal Presentation, Request that the PEO Vendor provide a Sample copy of their “… / Client Leasing Agreement (Texas Employees)
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