Lane 3

PEOs – Convenience Store Insurance

Would you buy all your groceries at the local convenience store? Of course not! So why buy your benefits from a Professional Employee Organization (PEO)? Convenience comes at a price.

In a nutshell, a PEO, sometimes called a “staff leasing company,” will put your employees on its payroll and provide them with employee benefits and workers compensation coverage. It also provides you with payroll administration and a human resources help desk service. In turn you pay your insurance premiums and an administration fee (typically a percentage of payroll).

A PEO’s sales pitch is pretty enticing to an uneducated small employer: (i) Get access to large company benefits, HR expertise, and reduce your liability as a plan sponsor. (ii) Avoid the hassles of administering a benefit plan. (iii) By combining your few employees with the PEO’s larger group you have access to lower insurance premiums and less volatile renewal increases. But, the devil is in the details.

Several weeks ago we had the opportunity to compare one of our client’s benefit package against the quote of a PEO – and we kicked butt! The PEO came in promising this eleven employee group $17,000 in annual savings. But we noticed an inconsistency in its proposal. In its spreadsheet the PEO quoted $18,800 in annual administrative fees, but when you did the math using the rate outlined in the quote those costs came to $57,200. And, the medical insurance we provide is far superior to that quoted by the PEO. So, in the end, when you made an apples-to-apples comparison the PEO had $102,200 in total annual costs (or $140,600 if you used the higher $57,200 fee) against our program for $86,400.

One component of the PEO sales pitch is that it will reduce your liability as a plan sponsor. To a degree this may be true, but probably not to the extent you may expect. You still have a number of responsibilities. For example, if Fred quits work and you fail to notify the PEO for several months then the PEO may rightly balk at providing COBRA benefits, thus leaving you with an uninsured liability to pay the person’s medical bills for the next eighteen months. In a similar manner, if you do not pass out the benefits booklet you may be on the hook for certain unpaid claims. Many responsibilities you have as an employer are still present under a PEO. The PEO’s contract will spell out your responsibilities – and will typically include a hold harmless agreement as well.

So after all of this what is my recommendation? Let the free market work! Get quotes from Administaff, ADP TotalSource, Oasis, Adams Keegan (I find it funny that this one seems to avoid at all costs the PEO / staff leasing label. Come on, be proud of who you are!) or some other PEO and from an ethical insurance broker that knows how to compare a staff leasing product to a traditional benefits package. Pretty quickly you will see the value of keeping your benefits in-house.

Several years ago we moved a 65 employee neonatology practice from one of the aforementioned PEOs and in doing so saved the employer over $190,000 in annual costs. We moved payroll to a national payroll administration company, workers compensation to a stand-alone policy, and kept the employer’s medical with Aetna (the same carrier and benefit design they had through through the PEO).

If you do not have the time or expertise to administer your payroll through QuickBooks or a similar program then consider using ADP, Paychex, or your accountant/bookkeeper for that task. Find a competent insurance broker to handle your employee benefits and your property and casualty coverages.

An Atlanta start-up may be tempted to turn to a PEO in order to minimize time spent on payroll, employee benefits and HR issues. But doing so will be expensive compared to the in-house alternative. Convenience has its price!