A PEO, or Professional Employer Organization, is a tool some companies use to offload a variety of responsibilities to a third party. These responsibilities can include payroll, business insurance, recruiting and onboarding, employee benefits, and more. Many times, as companies grow and they hire more internal staff, PEO services can become redundant. When that occurs, determining the best path forward can be overwhelming.
One of the most challenging aspects of exiting a PEO can be the transition of the employees’ legal employer. While in the PEO, the PEO is the employer. Once the PEO exit is complete, the company becomes the employer. This can create some confusion around tax implications and benefits. It’s important that when these services are no longer managed through the PEO that nothing falls through the cracks.
Life After a PEO: Impact on Benefits
These are a few common issues employers experience when transferring employee benefits out of a PEO:
- FSA balances: When the PEO is the employer, once the relationship is terminated, employees may be unable to access FSA funds in an FSA sponsored by the PEO, even if the plan year is not over. Some PEOs won’t even process claims after the relationship is terminated, even if the claim was incurred before the date of term. Communicating the impending termination of the relationship to employees early can help them plan to spend down their FSA funds, rather than forfeiting them.
- Medical/Dental Deductible reset: This is especially important if effective dates will change as a result of the PEO exit. Some PEOs have one common effective date and some allow each member to choose their own effective date. Regardless of the situation, employers should ensure that if the deductibles and out of pocket maximums reset, employees are aware and prepared for any additional costs they may incur.
- COBRA: Some PEOs will charge significant fees to manage COBRA participants after an organization has left the PEO. Employers should negotiate the inclusion of the COBRA participants with the new medical insurance carrier.
- Tax withholdings: Some higher compensated employees may have already paid a significant portion of their annual requirement toward social security and/or Medicare taxes. These amounts may reset with the transition to a new employer. However, under the Small Business Efficiency Act, PEOs may register with the IRS as Certified PEOs (“CPEOs”), which will prevent FICA and FUTA wage bases from restarting if an organization exits a PEO mid-year.
If you’re currently in a PEO and looking to make an exit, HCW can help. Contact us for more information.