The differences between partnering with a PEO or a broker

Small business owners know that top-quality employee benefits are the secret to attracting and retaining workers. Health coverage is often the most sought-after employee benefit. In fact, in our recent survey, 92% of employees rated health benefits as important. But comprehensive health benefits come at a cost. And small businesses don’t have the negotiating power with insurers that larger companies do.

Professional employer organizations (PEOs) and insurance brokers are excellent resources small businesses can leverage to navigate the health insurance market. Both options help employers secure affordable group health coverage for their employees. But what are the differences between a PEO and a broker, and which is best for your organization?

In this blog post, you’ll learn:

• The critical differences between partnering with a PEO and an insurance broker.
• The pros and cons of each option to help you determine which is the right choice for your company.
• Alternative solutions to group coverage, such as the stand-alone health reimbursement arrangement (HRA).

What is a PEO for health insurance?

A PEO is a comprehensive HR outsourcing solution for businesses. The PEO provides various HR services by entering into a co-employment agreement with an employer. By “co-employing” the client’s workforce, the PEO agrees to manage specific business tasks, such as administering employee benefits.

Because PEOs partner with multiple employers, they combine each employer’s employees into one larger group. This boosts their negotiating power with insurers and enables them to access higher-quality health plans at a lower premium. This can make obtaining a group health plan more feasible for small business owners who may not be able to afford one on their own.

What services does a PEO offer?

PEOs offer a broad range of services that can make it easier for small employers to manage HR, employee benefits, and compliance regulations. Streamlining these business operations allows employers to focus on other tasks that can help them grow their company.

Below are a few services that a PEO can provide:

What are the pros and cons of partnering with a PEO?

PEOs can be an excellent option for small business owners who need help in providing affordable health insurance. Insurers consider PEOs less risky because they have a larger employee pool. Spreading risk around a larger pool of workers means premiums will be lower than they would be for one business with a smaller pool. But using a PEO has other advantages as well.

The following are some benefits of working with a PEO:

1. They offer quality coverage options. PEOs can provide health plans that insurers usually make available only to large businesses. Due to the larger risk pool, you’ll likely receive lower premium rates. They can also help you add other benefits, like wellness programs and retirement plans, to your compensation package to improve retention.
2. They can provide various HR services. In addition to securing health coverage, the co-employment model allows PEOs to manage multiple HR services, such as payroll and benefits administration.
3. They help with legal compliance. PEOs can help you navigate complex legal compliance requirements, such as employment laws and taxes. This can be especially helpful if you have remote workers or physical office locations in multiple states.
4. They’re responsible for their errors. PEOs—not your business—are liable if they make errors regarding their share of federal and state compliance regulations. You’re still liable for any errors you or your employees make.
5. They provide ongoing support. PEOs offer frequent support and resources so you and your employees can have your questions answered every step of the way.

Undoubtedly, PEOs can help run many aspects of your business. But despite their many advantages, using a PEO has a few downsides.

Below are some potential downsides of partnering with a PEO:

1. You may have limited health insurance options. Typically, PEOs only offer a few health coverage options, which may not provide enough flexibility to meet your needs.
2. You’ll be subject to fees. Working with a PEO includes an initial set-up fee and a monthly fee for ongoing service. The recurring payment is usually a percentage of your total payroll or a flat rate per employee. While the cost varies, the average is between 2% and 12% of your business’s payroll¹.
3. You’ll share some control of your company. Even though PEOs don’t make company decisions, outsourcing your HR tasks gives them some control over managing certain aspects of your company. Some employers prefer having an internal HR team so they can have total authority over business operations.
4. Your location may limit you. Depending on their license, a PEO may only be able to work with clients within a particular region. Additionally, the services a PEO offers can vary by location. For example, four states require employers to buy workers’ compensation insurance from the state, not a PEO².
5. Making changes to your HR strategy can be difficult. If you decide to switch from a PEO to an internal HR department, the initial process can be challenging. You’ll be essentially building your team from the ground up. This can be time-consuming and pause the systems and employee benefits your PEO currently has in place.

What is a broker?

A health insurance broker acts as an intermediary between an employer and an insurer to help the employer find and buy the best medical coverage for their business. Unlike a PEO, brokers assist you without a co-employment relationship.

First, the broker meets with you to understand your company’s goals. Then, they’ll work with several insurers to research and compare policy options and rates on your behalf. Afterward, they present several recommendations based on your business needs and budget. Sometimes, they provide a risk analysis to help you make an informed decision.

Brokers don’t work for insurance companies, so they can’t complete insurance sales or bind coverage. Once you decide on a health plan, they’ll help you work with an insurer or insurance agent to complete the transaction. But there’s an upside. Brokers work directly for their clients, so you’ll receive unbiased advice when considering your options.

What services does a broker offer?

Some brokers only help you compare and shop for a plan, while others may offer more services, like benefits administration. So, before partnering with a broker, it’s vital to ask what services they offer.

Below are a few services that a broker can provide:

What are the pros and cons of partnering with a broker?

Brokers are popular with small businesses because they can provide insurance options without the need for a long-term contract. This flexibility is why a recent survey found that almost 86% of employers were “satisfied or very satisfied” with their broker³. But there are other advantages to using a broker.

The following are some benefits of working with a broker:

1. They’re inexpensive. Brokers receive commissions from insurance companies when they sell a policy. So, there are typically no costs for an employer to work with a broker. Additionally, brokers don’t charge monthly fees like PEOs. Brokers may charge fees for additional services, like benefits administration.
2. They can offer a wide variety of plans. PEOs typically have limited policy options. But brokers can suggest other health benefits, such as self-funded plans or direct primary care memberships, in addition to fully-insured, major medical plans.
3. They provide expert support. Brokers are experts in the complexities of the insurance industry. Their institutional knowledge and hands-on customer service can guide you toward the best policy for your company.
4. They can help you apply for the health care tax credit. Small Business Health Options Program (SHOP)-registered brokers can help small employers determine if they qualify for the small business health care tax credit. They can help you apply and enroll in a SHOP plan to save money on your health insurance premiums if you qualify.
5. Some offer long-term services. While many brokers only help you find a policy, some offer additional services to help you manage your benefits. While these services may not be as extensive as a PEO offers, having access to a limited amount can still be beneficial to small employers.

Insurance brokers are an affordable option for small businesses seeking health coverage. But before you reach out to a broker, consider the possible downsides.

Below are some potential downsides of partnering with a broker:

1. Your plan options may be less robust: PEOs can access high-quality health plans because they represent a larger group. But, small employers have fewer options due to the minimum participation requirements, budget, and company size. Even with a broker, your policy options may not be as attractive as you hope.
2. You may pay a higher premium: Many small employers have trouble finding a health plan due to their smaller pool of employees. While a broker can help you find a plan and negotiate the best price possible, the insurer may charge you a higher premium due to the higher risk they’re taking on.
3. They could take advantage: Brokers work on a commission basis. A non-ethical broker could offer policy options that aren’t best for your business to secure a higher payout from the insurance company. It’s best to work with an established and trusted broker. Be sure to read reviews or get referrals from other business owners.
4. They provide fewer HR services: Brokers provide less long-term assistance than PEOs. If you’re looking for help with various HR services—such as payroll, taxes, and compliance—an insurance broker won’t meet all your needs.
5. They can’t bind coverage: Once a broker helps you find a plan, they’ll transfer you to or work with an agent or insurance provider to finish the sale. This break in service from the broker to another party may not give you a cohesive shopping experience.

PEO vs. broker for health insurance comparison chart

The chart below compares key differences between PEOs and brokers to help you determine which partner option is right for your organization.

What are the alternatives to group health insurance for small businesses?

If you’re unsure whether a PEO or a broker is the right choice for your business, you can consider other options. There’s a type of health benefit that doesn’t require shopping for group coverage: the stand-alone health reimbursement arrangement (HRA).

An HRA is an employer-funded health benefit that employers use to reimburse employees tax-free for health insurance premiums and other out-of-pocket medical costs. With an HRA, you set a monthly allowance that your employees can spend on healthcare. Once they make an approved purchase, you reimburse them tax-free up to their allowance amount.

Here are some advantages of HRAs over group health insurance plans:

• HRAs are employer-owned. This means that any unused funds stay with you if an employee leaves your company.
• They don’t require you to pre-fund an account. You only reimburse your employees when they show proof they purchased an eligible medical expense.
• They have no minimum participation requirements.
• There are no annual rate increases.
• HRA reimbursements are income-tax-free for employees and free of payroll taxes for employers.
• There’s no need to negotiate with a carrier for a group policy rate.

Stand-alone HRAs don’t integrate with group health insurance. Instead of getting group coverage through a PEO or broker, your employees buy their own individual health plan that works best for them. This makes stand-alone HRAs easier to manage than complex and expensive group plans for small employers and a more flexible health benefit for employees.

In the following sections, we walk you through two popular stand-alone HRAs in greater detail.

Qualified small employer HRA (QSEHRA)

The qualified small employer HRA (QSEHRA) is for employers with fewer than 50 full-time equivalent employees (FTEs) who don't offer a group health or ancillary plan. While the QSEHRA has no minimum contribution requirements, the IRS does set annual maximum contribution limits.

Here are some key features of the QSEHRA:

• You must offer it on equal terms to all your W-2 full-time employees. You can add your part-time employees to the benefit as long as they receive the same allowance as your full-time staff. You can customize allowances by family status.
• Employees must have a health plan that provides minimum essential coverage (MEC) to participate in the benefit. This means employees on a spouse’s or parent’s qualifying plan can still participate.
• Employers can customize their QSEHRA’s eligible costs. For example, they can reimburse your employees for only health insurance premiums or their premiums plus qualified out-of-pocket medical expenses.
• Employees with a QSEHRA can collect their premium tax credits if their allowance is unaffordable. But, the amount of their QSEHRA allowance will reduce their subsidy.

The flexibility of the QSEHRA makes it ideal for small employers seeking a high-quality yet budget-friendly health benefit.

Individual coverage HRA (ICHRA)

The next option is an individual coverage HRA (ICHRA). The ICHRA works similarly to the QSHERA. But it has a few notable differences. For example, the ICHRA is available for businesses of all sizes and has no maximum contribution limits. So, you can offer your employees as much allowance as your budget allows.

Here are some more key features of the ICHRA:

• You can vary eligibility and allowance amounts based on employee classes. This makes it easier to customize the benefit to your organization’s unique needs.
• If your business becomes an applicable large employer (ALE), you can use the ICHRA to satisfy the employer mandate, eliminating the need for costly group health insurance.
• Your employees who qualify for premium tax credits can opt in or out of the ICHRA based on affordability.
• Only employees with a qualifying form of individual health insurance can participate in the benefit. Coverage from a family member's group policy or an alternative health plan, like a healthcare sharing ministry, is ineligible.

With a QSEHRA or ICHRA, you can offer your employees a personalized health benefit that doesn’t break the bank. Better yet, the flexibility of an HRA improves your company’s chances of attracting and retaining talented workers in a competitive job market.

Conclusion

Offering health insurance is a surefire way for small employers to boost their benefits package and retain talented workers. PEOs and brokers can help you find quality health benefits at an affordable price. But depending on your need for HR services and other long-term assistance, one insurance expert will be better than the other. So, comparing each option carefully is vital to ensure you partner with the best one for your specific business goals.

If you decide to ditch group health insurance in favor of a personalized and flexible stand-alone HRA, PeopleKeep can help. Our HRA administration software can help you compliantly manage your health benefit in minutes each month. Contact an HRA specialist to determine whether a QSEHRA or an ICHRA is best for your organization.

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