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The Economics of PEOs: The 411 on what PEOs cost and how they invoice

By Shraga Jacobowitz

Okay, it’s time to address the elephant (or should we say the piggybank) in the room.  I know as you read all my (I hope, helpful) articles, you’ve been wondering about one thing…..What’s the bottom line?  While PEOs seem too good to be true, offering an array of benefits for so little cost, they really are THAT good!

So how do PEOs do this? And how much is it going to cost you?

PEOs are able to offer so much for so little because of their very structure.  Companies using PEOs are entering into a co-employment arrangement, which actually means that your employees are not only employed by your company, but also by the PEO (much LARGER) company.  This co-employment allows your company to offset some of your liabilities and receive benefits usually only offered to much larger companies.

You may already know the benefits of PEOs. If not, you can always check out our inaugural newsletter article or any of the other newsletters that covered this topic.  And once you understand how a PEO can save you money, you can get down to the crux of things. As the saying goes, “there are no free lunches.”  And we’re back to that all important question, “What’s it going to cost me?”

So, of course, a PEO will charge you for their service, but their cost outweighs the savings you receive from partnering with a PEO tenfold.  Keep in mind when partnering with a PEO that in many cases even after factoring the fees of a PEO for their service, they are delivering a much bigger net savings to their clients.  As part of a PEO, you are being offered savings on your health benefits, workers comp and creating a lower-risk environment. In addition, partnering with the majority of PEOs can eliminate the need to have a HR department and will definitely eliminate the need to use a Payroll processing company, saving you even more money across the board.  As for the PEO cost, like everything else in the PEO world, every PEO is different. But there are three basic price models offered by a PEO:

The Flat Rate

The Percentage

The Bundle

I’m sure you’ve all already picked out your favorite pricing structure, but just in case you’re not sure which is best for you, here’s a quick rundown of the three options:

  1. The Flat Rate: Here the PEO will charge you a flat rate per employee. People like this because they know what they’re paying. The downside of this is you’re paying the same amount no matter how much time each of those employees put in and how much they benefit from your PEO partnership. Rates usually vary depending on company size and/or a number of other variables and fall between $60 and $200 per employee.
  2. The Percentage: These PEOs charge a percentage of your gross payroll each month. The downside is as this will fluctuate payroll to payroll, there’s no consistency in fees and you never know what to expect. In addition, this pay structure may throw you some surprises along the way, in the form of higher service fees when you give an employee a raise or provide bounces further increasing your cost/fee for the PEO. Its simple math, the percentage on a $1000 weekly pay is going to jump up when you raise that employee’s pay rate to $1500/week. The upside is in many cases, it can actually end up cheaper than the flat rate. Again, this is simple math, i.e., dividing your percentage fee by your number of employees may show you that your percentage rate WILL often fall out cheaper than the flat rate amount. Rates are usually based within a range of 2 and 4 percent.
  3. The Bundle: While we generally like bundle deals (I mean, who doesn’t like the TV, Internet, Phone packages), you generally don’t want a bundled PEO rate. This means the PEO invoices you one percentage which includes your payroll taxes, workers comp costs, (and in some cases your employee benefits cost) and their administrative fee in one lump percentage against your gross wages per pay cycle.  Honestly, I don’t see any upside to this price structure, unless you just don’t want to be bothered with the actual cost of things and prefer to pay bills blindly (and if that’s the case, I have a bridge to sell you).   The downside to this is that you have no idea what your costs are and therefore have no way of tracking, reconciling or reporting your individual expenses. Besides that, not knowing what you pay, makes it quite difficult to shop around or negotiate lower rates for those items that are experience rates.

But be aware, not all bundles are created the same, some PEOs will bundle everything while others will bundle Workers Comp and Administrative fees.  If you’re looking for something bundle, the latter may be a better bet.

Regardless of which price structure you decide is best for you, it’s good to know that most PEO quotes will include six standard costs (whether they are bundled or not):

  1. FICA
  2. FUTA
  3. SUTA
  4. Workers Compensation
  5. Employee Benefits Premiums
  6. Administrative Fees

Not sure what these are, you can check out Unscrambling the ABC’s of the PEOs and Wrapping up the ABC’s of PEOs, but for our purposes, all you have to know is the first two, both federally mandated employee withholdings will not (or I should say SHOULD NOT) differ from PEO to PEO. When it comes to the next three, that is when you will see a difference in your quotes. Because SUTA (State Unemployment Tax), Workers Compensation and Employee Benefits Premium rates depend on a variety of factors (such as operating state, number of claims –whether unemployment or workers comp claim, and the workers comp code they are using), each PEO will offer these at different rates. This is where you can start comparing prices.  And finally, as discussed above, the administrative fees will depend on how the PEO decides to charge you.

Like I said above MOST PEOs will have these six standard costs (and if they don’t, that’s an immediate red flag), but it is also important that these six costs are broken down on the invoices you receive from the PEO.  While this seems obvious, many PEOs proposal will show you this breakdown but not include it on their invoices. Before signing on with a PEO, make sure you ask about their invoicing practices or ask your handy PEO consultant (like ARC) how to navigate the billing and invoice process.

My final word of advice, ALWAYS LOOK FOR HIDDEN FEES.  These fees can be anything from additional charges for HR Services, EPLI, additional support or added technology modules, employee training. Many times, these fees will not be included in the original quote. Before signing on, ask the PEO for documentation of all fees and read everything word for word, including footnotes, endnotes, addendums (and any other way a PEO can sneak in additional charges).

Sounds like a lot of work? It can be, but it doesn’t have to be.

My ultimate word of advice that will always stand true: Contact a PEO Broker or consultant such as ARC Consultants (of course) to do the heavy lifting for you. Because these consultants have relationships with many PEOs, they know the ins-and-outs of each PEO’s price structure, whether there are hidden fees, who offers supplementary services for free, who charges for them, and just about everything you need to know about choosing the right PEO at the best rate for you.

Want to know more information about price comparing PEOs and selecting a PEO that fits all your needs? Contact ARC Consultants today.

Wrapping up the ABC’s of PEOs: H-Z of PEO Terms defined


By: Shraga Jacobowitz

We’re back (did you miss us?) with more PEO terms demystified!  But please take note, when writing up the list of words we wanted included for these two articles, we realized how many industry relevant words their actually are. So don’t see a word that got you stumped here or in our part I of this article (click HERE for a review)? Let us know and we’ll help demystify it for you.

As for now, keep reading for H-Z of the PEO terminology defined. 

  1. HIPAA- You’re probably familiar with HIPAA (could they get anymore letters into this acronym or what?), from the pile of papers you are always made to sign when visiting any doctor. But what you may not have known this multi-letter acronym standing for the Health Insurance Portability and Accountability Act can affect you as a business owner, because besides protecting your privacy at the doctor it also protect personal information and data collected and stored in company medical records. You never want your employees’ medical information being compromised.
  1. HRIS- HR has basically gone high-tech! HRIS is an online solution or software used for data entry, data tracking and the information requirements of a business’s HR management, payroll and bookkeeping operations. A HRIS will help your company process open enrollment, hiring and termination of employees, employment documents, benefit elections, and so much more….It’s basically HR at your fingertips, something any business owner can appreciate.
  1. I-9- The result of a hot button topic, the I-9 is a form required by the Immigration and Naturalization Services to verify your employee’s identity and eligibility to work. Your employees cannot be put on payroll until they’ve submitted this form. In simple English: no paper, no pay.
  1. Independent Contractor (1099 worker) – These workers may do work for you but don’t work FOR you, hence the term independent. They are not your employees and therefore, won’t be on your payroll. Because they are not on payroll, they will not have any income tax withheld from their paychecks, hence them also being known as 1099 workers, referring to the form they receive at the end of the year, instead of the good old W2. 
  1. Job Description – This is exactly what it sounds like – a description of a Seems simple enough, but don’t it let that fool you. You will need to have a clear specification for this term for all kinds of forms and applications. It should include all responsibilities and obligations, as well as the purpose, scope, and working conditions of an employee’s job, along with the job title and the name of the person to whom the employee reports.
  1. Loss Runs- These are reports provided by your insurance company that document the claim activity on each of your policies. Think of it as your scorecard of how much you could be losing if you weren’t insured. 
  1. Medicare Tax – This chunk of tax on every paycheck goes to fund Medicare – the health insurance program designed for people 65 years and older. You may not like it now, but we’re sure you’ll appreciate it at 65! 
  1. Onboarding/Implementation/Enrollment- These terms refer to the act of absorbing a new employee into your company. It includes all training, guidance, orientation, and the entire learning process involved in the employee’s new position.
  1. Open Enrollment- This is the only time of year for individuals to add, reduce or change health insurance coverage without any qualifying events (see the definition of Qualifying Event below).  Insurance rates will also usually change at this point. 
  1. OSHA- You probably think of OSHA as the people who come in to clean up the mess after any disaster, but in reality the Occupational Safety and Health Administration is a division of the DOL and was created to prevent all work-related injuries, illnesses, and death through enforced workplace safety rules. Gotta keep those workers safe at all cost! 
  1. Performance Management- This is the ongoing process of communication between a supervisor and an employee throughout the year. It helps keep employees in line with the company’s goals and vision, and it helps to keep you in touch with your workers. You can benefit greatly in this task by either partnering with a PEO which can provide performance management and crucial review technology. Alternatively, you can invest in a system that can do this for you, but then, you wouldn’t get all the other great advantages of a PEO, of course. 
  1. PTO- Paid Time Off is a policy that combines vacation and sick leave in one option. It basically gives your employees the choice of spending their days off nursing a cold or nursing a fruity umbrella drink while vacationing in Aruba. Again, a PEO’s HR representative can assist you in implementing your PTO and advising you on the best practices. 
  1. Qualifying Event- any change in an employee’s personal life that can impact their eligibility or their dependent’s eligibility for benefits outside of the open enrollment period (see the definition for open enrollment two words up).  This can include loss of health insurance for any reasons BESIDES not paying your premiums or any other voluntarily termination of benefits, change in household size (i.e., marriage, divorce, birth, adoption, of death), moving locations or changing or eligibility status. 
  1. Recruiting- You know what recruiting is – it means looking for the best candidate for a job. It includes analyzing the job requirements, working to attract employees, screening applicants, and then finally hiring new employees and training them in for their new role. What you may not know however, is that your PEO can actually help you with this.
  1. Social Security Tax- This tax funds social security benefits. The social security program is the government’s way of skimming off paychecks during the working years, and then putting that money back in the tax-payer’s pockets when they need it during their golden years. Again you may not like it now….but hopefully if the program is still around, you’ll enjoy it during your golden years.
  1. SUTA- The State Unemployment Tax Authority is a state tax paid by the employer to fund unemployment benefits. Your SUTA rate will be based on your business’ overall claims experience. 
  1. Tax Restart – A tax restart is kind of like setting back the clock. It happens when an employer is required to restart paying taxes mid-tax year, even though they’ve already made contributions for Social Security, Unemployment and more. Government regulations requires this when a new tax ID number is used under which wages and taxes are being filed. It can be a huge headache, but with a PEO handling the logistics, it’s just a mild annoyance. Plus partnering with a CPEO (see our article on that HERE) can actually the headache all together.
  1. Time and Attendance Systems- Also called TNA, time and attendance systems track and monitor the hours an employee begins and stops working. It lets you see who’s always slipping in twenty minutes late and who’s clocking out early every Wednesday. It can even help you cut costs incurred by overpaying employees for hours they don’t work. A TNA can be an old-fashioned timeclock or, any of the numerous apps or software programs designed for just this purpose.
  1. Unemployment Claims Administration – All administrative tasks involved in unemployment claims. A PEO will take care of all that tedious paperwork and will help you protest the claims whenever possible. Because that’s just what they do….make your job easier and save you money.
  1. Voluntary Benefits – Benefits that the employee elects to pay for on their own. Of course, while typically the employee pays for these benefits, the company will still need to full the administrative role which can be a huge HR burden. With a PEO, the PEO administers all the voluntary benefits relieving you from yet another HR burden. Plus, these benefits allow you to offer a more attractive package which in turn allows you to attract and retain top talent for your organization without putting a big dent in your budget.

Some voluntary benefits can include:

  • FSA/ Flexible Spending Account – an untaxed account used to pay for out-of-pocket health care costs.
  • Childcare FSA- This account also lets employees use tax-exempt funds for extra expenses. In this case, the money is used for childcare costs the employee incurs while at work, or for adult daycare expenses for elderly family members who live in their home. 
  • Commuter benefits– Hate your commute? Guess what so do most people but at least commuter benefits, AKA qualified transportation fringes, take off a little of the sting of sitting in traffic or hours on the subway. These benefits are basically a pretax benefit that allows employees to put aside pretax dollars to pay for the cost of commuting to and from work even including parking etc. Although like all good things, the IRS does put a limit on these benefits, so a helicopter commute is probably out of the question.
  • 401k- It’s always good to think about the future. With a 401k, an employee can choose to make contributions from his paycheck to a retirement fund. 
  • EAP/Employee Assistance Program- a work-based intervention program designed to help employees resolve personal issues that may be negatively impacting their performance at work.
  • Added Medical Benefits – while health insurance is great, anyone will tell you that having the extras covered is a huge benefit as well. This can include dental, vision, supplementary health insurance, long (LTD) or short (STD) disability insurance or prescription coverage.
  • Matters of Law – even the average law abiding citizen can need legal help or protection, and these benefits do exactly that. Whether you need protection against law suits (legalshield), identity theft protection or life insurance to protect the next generation, you can be covered by a voluntary benefit to fit your legal needs.
  • Employee Perks Program – any other benefits or perks an employee offers. It can include a flexible schedule, paid sick days, performance bonuses, gym membership and anything else your employees would be thrilled to have. I’m thinking a Froyo bar would be a nice addition, no?
  1. W-2 – The W-2 form is a Wage and Tax Statement used in the US tax system to report on wages paid to your employees and on taxes withheld from them. (See Independent Contractor above)
  1. W-4– We know, the tax forms don’t stop coming. The W-4 form is actually for the employer – it tells you exactly how much tax you should withhold from an employee’s paycheck. It bases this info on said employee’s marital status, the number of exemptions and dependents the employee has, and on several other factors. 
  1. Worksite Employee – Also called a WSE, a worksite employee is simply what a PEO will call your employees. Because the PEO will become the administrative employer for payroll, taxes and HR purposes, you become the worksite employer, as in the actual employer who is onsite making the day-to-day decisions and still maintaining control of your business. By default, your employees and therefore referred to as WSE’s. 

And that’s allllllllllll folks! I guess X,Y and Z are not such popular letters in the PEO world, and we’ve come to the end of our terms with a W. So with that I’ll leave you with one Y word, I’m sure you’ll all understand – YOU!

At the end of the day, you need to do business in a manner that is most effective for you and which makes the most sense to you.  Partnering with a PEO can help you tremendously, but if facing the prospect of wading through the confusion of this industry on your own has you more terrified than relieved, that’s where a PEO consultant or broker comes into play.  So feel free, memorize this list of relevant terms and definitions or contact ARC Consultants today and let them find the best solution for YOU!

Unscrambling the ABC’s of the PEO’s: PART I

By: Shraga Jacobowitz

So you’ve finally decided to partner with a PEO or maybe you’ve been partnered for one for years already. I’m sure you’re excited at the prospect of no longer spending hours of precious company time dealing with issues like payroll and other aspects of HR management, and you’re completely excited about the opportunity to outsource the work to the professionals!! After all, you’ve been told numerous times (in these articles alone) that a partnership with a PEO can save you tons of money and hours of work.

And yet…when researching PEOs or interacting with your current PEO, you’re constantly baffled by the terms the companies are throwing around, and it seems like you are spending almost as much time just trying to navigate and decode the PEO world and terminology.

Like anything else in life, when you partner with a PEO, there is definitely a learning curve, which is of course where a PEO broker and consultant comes in handy — they can literally help you skip to the front of the class and answer all your questions.  But just in case you want to feel like your PEO is speaking English rather than Chinese to you…here is part one of a comprehensive list of PEO terminology and related words broken down into clear, simple English. (Hey, did you really expect us to get all of them into one article?)

Read on for our comprehensive list of PEO terminology and related words broken down into clear, simple English.

  1. ACA – The Affordable Care Act, more famously known as ObamaCare (although we’re not sure what our current president has to say about that) is a federal law that became effective in 2010, requiring all American citizens to be covered by health insurance. While talks of repealing the ACA has been taking place since Trump took office, the ACA is still firmly in place, so whether you’re a fan of the new administration or you’ve terminated your Twitter account in the last year, it doesn’t make a difference, you and your employees must comply with the ACA or risk being fined. 
  1. Admin Fee – An administrative fee or service fee is a monthly fee charged to their clients by the PEO. It can be a fixed dollar amount per employee per month (PEPM) or a percentage of your gross annual payroll. 
  1. Administrative Employer – The Employer of Record in a co-employment relationship, in other words, the PEO. This doesn’t mean the PEO has suddenly become your boss, but instead that they will be responsible for all administrative tasks of HR and compliance, including tax payments, payroll processing and more. And like I’ve said before, no need to feel like you are handing over the keys to the castle. You, the PEO client maintains full direction and control of your company. 
  1. Ancillary Benefits- Sometimes called Voluntary Benefits. This refers to a secondary health insurance that covers miscellaneous medical expenses such as vision, dental, STD, LTD, Life, Group Life, 401k, FSA, HSA, hospital indemnity plan such as AFLAC or other similar programs; to name a few. 
  1. Applicant Tracking System- An applicant tracking system (ATS) is software designed to help an enterprise recruit employees in the most efficient way possible. You can use an ATS to post job openings, screen resumes and schedule interviews with potential employees. 
  1. Carve-Out – While carving out is something you do at Thanksgiving Dinner or wood-working class, this term actually refers to a hybrid PEO arrangement where the client company still maintains their own workers’ comp policy instead of obtaining coverage through the PEO’s master policy. This will occur when you simply already have an attractive policy in place, so why would you mess with a good thing? But no worries, the PEO can still assist you with the administrative side of your own policy. 
  1. Classification Code – Often referred to as workers comp code or class code. This code allows your policy holder to see how the risk exposure your work has (think dangers of real deep sea fishing vs. the relative safety of fishing for sales leads) and classifies the type of work being performed. The classification code provides an associated code so that premium rates can be established in accordance to the work’s level of risk. 
  1. COBRA – No, it’s not about finding a venomous snake in your facilities. The Consolidated Omnibus Budget Reconciliation Act (COBRA) gives qualifying employees and their families who lose their health benefits the right to choose to continue group health benefits provided by their group health plan for limited periods of time. This way, you won’t be leaving your employees without coverage. 
  1. COI – A Certificate of Insurance is a document issued by an insurance company that certifies that an insurance policy has been purchased by a specific party. You can’t use this as a substitute for the actual policy, but it is proof that you’ve got insurance. (As if your monthly premiums aren’t proof enough.) 
  1. CPEO – If you’ve been reading my newsletters religiously (which of course I’m sure you have been), you should already be familiar with this term from my July newsletter on the topic. But in case you missed that one, here’s a quick rundown. This term is only a few months old. Effective June 1st, 2017, a Certified Professional Employer Organization is one who’s been certified by the IRS. Like everything else the IRS oversees, becoming qualified as a CPEO involves lots of paperwork, applications and a strict background check. And just in case you want to read that original article (for review purposes only of course) you can check it out here. 
  1. Dividend – A refund of premiums for workers’ comp policies. How cool is that? It’s almost like getting free money! The refund is paid when the claims of the members on the plan did not exceed the premium payments. Dividends are offered, but not guaranteed, by some PEOs. 
  1. DOL– The U.S. Department of Labor; (some of you may know them as Big Brother, because the DOL is always watching). In reality, the DOL is there to promote the welfare of job seekers, wage earners, and retirees by improving their working conditions, advancing their opportunities for profitable employment, protecting their benefits, and helping employers find workers. The DOL also protects workers’ rights to safe working conditions; a minimum hourly wage and overtime pay; freedom from employment discrimination; unemployment insurance; and other income support. What you have to know: treat your workers well and the DOL won’t be a problem for you. 
  1. EEOC – The Equal Employment Opportunity Commission is a federal agency charged with ending employment discrimination in the United States. The EEOC can bring lawsuits against private employers on behalf of alleged discrimination victims. So make sure you always hire fairly! 
  1. Emod –“Experience modifier” is a rate modifier used by the NCCI (National Council for Compensation Insurance) to define the risk of a particular employer. Obviously, the guy who cleans skyscraper windows will have a higher risk than the one who changes the paper in your copy machine. 
  1. Employee Census – Don’t worry; this isn’t a bunch of CEOs knocking on random doors and asking intrusive questions. Rather, it’s a report prepared by an employer that provides the insurance companies the necessary data for the underwriters to determine insurance and benefit rates. In addition an Employee Census may also help ensure that a company’s retirement plan is in compliance with Department of Labor laws and Internal Revenue Codes. 
  1. Employee Handbook – Remember that thick student handbook they gave out in high school? This is kind of the same thing. Sometimes known as an employee manual, staff handbook, or company policy manual, this handbook is distributed to employees and details the company culture, policies, and procedures. 
  1. EPLI– Employers Practices Liability Insurance is insurance purchased by an employer to protect himself/herself against errors in willful and accidental employer practices,  such as wrongful termination, harassment or other ugly situations that can come back to bite you. This way you’re never at risk of losing a year’s profit on one lawsuit! Thankfully, this is something that is usually included and provided to you as part of the services you get when you sign up to partner with a PEO. 
  1. ERISA– The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industries. You don’t need to fund their retirement cruises, but you do have to give your employees enough to live on in their golden years. 
  1. FICA– The Federal Insurance Contributions Act (FICA) tax is a United States payroll tax imposed on both employees and employers to fund Social Security and Medicare. You have to know that money for these programs is coming out of someone’s pockets, and in this case, it’s yours. 
  1. FLSA – The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping, and child labor standards for full-time and part-time workers in the private sector and in all levels of government. And while child labor is a thing of the past in the US, many of these other things can be a real problem for a business owner who doesn’t comply. 
  1. FMLA – We all think family is important, and thankfully for your employee, the government thinks so too. Covered employers must grant employees up to a total of 12 work weeks of unpaid leave during any 12-month period for one or more of the following reasons: the birth and care of a newborn child; placement with the employee of a son or daughter for adoption or foster care; caring for an immediate family member with a serious health condition; medical leave when the employee is unable to work because of a serious health condition. 
  1. FUTA – This one sounds waaaaay cooler as an acronym. The Federal Unemployment Tax Act authorizes the IRS to collect a federal employer tax to fund state workforce agencies as well as half of the cost of extended unemployment benefits.

As the title indicated, this is only Part I of this series…Who knew there were so many relevant terms to the PEO industry?  Stay tuned for the continuation of these terms in our next newsletter.

Or can’t wait for the next newsletter and you rather not wade through the confusion alone? Call ARC Consultants and see how we can help clarify the process and navigate PEO partnership for you.