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).
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.
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:
Type of service |
Description |
HR management |
They can provide comprehensive HR services tailored to the employer’s unique needs, such as:
|
They help their clients create a custom and affordable benefits package by negotiating rates for health insurance coverage and other employee perks. |
|
Broker services |
Depending on the client’s specific needs, PEOs can connect them with other vendors, insurers, and providers. |
Employee onboarding and offboarding |
PEOs can help hire and train workers, including creating onboarding materials. They can also help offboard employees, such as by designing the exit interview process. |
Tax and payroll services |
They can manage their clients’ payroll and tax obligations, like sending employees their Forms W-2 and 1099 during tax season. |
Insurance claim assistance |
PEOs can review and file worker compensation claims to insurers on behalf of their client’s employees. |
Compliance |
They help their clients comply with federal and state employment laws. |
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:
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:
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.
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:
Type of service |
Description |
Insurance solutions |
Unlike PEOs, brokers focus primarily on insurance, so they’re experts on the available products. They can help you buy various policies your business needs, including:
|
Budget management |
They compare plans and insurance companies to help you determine the best provider and plan at an affordable price. This includes looking at premiums, deductibles, and out-of-pocket maximums. |
Expert guidance during the shopping process |
Brokers help you navigate the entire insurance shopping experience, from understanding what you need in a plan to choosing a policy to helping you fill out the coverage application. They’ll also provide advice and answer questions. |
Policy renewal management |
Brokers can help you renew your policies at the end of the plan year or research new plans if you need to make changes to your benefits package. |
Insurance claim assistance |
They can work with your insurers and help you and your employees navigate the medical claims process. |
Risk assessment |
Brokers can create risk management strategies to help you tailor your benefits more effectively. For example, they may suggest offering a wellness stipend to help your employees stay healthy and reduce claims. |
Compliance |
A good broker keeps clients updated on industry news and new federal or state regulations in case any changes affect their benefits. They often keep a compliance calendar to alert their clients before important dates. |
Benefits administration |
Brokers may offer to handle a few benefit administrative tasks, such as keeping accurate records and training employees on how to get the most out of their health plan. |
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:
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:
The chart below compares key differences between PEOs and brokers to help you determine which partner option is right for your organization.
PEO |
Insurance broker |
|
What do they do? |
A PEO is a comprehensive HR solution that provides employers various HR services and employee benefits. |
An insurance broker is an intermediary between an employer and an insurer to help the employer find and buy the best health coverage for their business. |
Do they use a co-employment agreement? |
Yes. |
No. |
How much do they cost? |
PEOs typically charge a one-time set-up fee and a recurring monthly fee for services. The average monthly cost is between 2% and 12% of your business’s payroll. |
Brokers receive a commission from insurance companies when they sell a policy. Employers typically won’t have to pay any upfront cost for standard services. |
What types of insurance companies can they work with? |
PEOs typically work with a few health insurance carriers and provide limited health plan options. |
Brokers don’t work for insurance companies, meaning they can partner with a wide variety of insurers. But your company size may limit your options. |
How much do health plans cost? |
PEOs have access to a larger pool of employees. So, they have more buying power with insurance providers. This means they can offer higher-quality health plans to small employers at a lower premium rate. |
Small employers have limited plan options. So, you may pay a higher premium due to your company's size. Small business owners can offset the cost of group coverage if they qualify for a tax credit and enroll in a SHOP plan. |
Do they provide other services? |
Yes. In addition to securing health insurance and other benefits, PEOs offer other HR services, including payroll, benefits, compliance, and worker's compensation. |
A broker's primary role is to help you find insurance coverage. However, some may provide a limited number of extra services. |
Do they help with compliance? |
Yes. PEOs take on some legal compliance responsibilities because they’re a co-employer of your company. |
Some brokers may provide limited compliance information regarding insurance. Your business remains liable for any errors. |
Do they use technology? |
Yes. PEOs will use HR software to manage their co-employment duties, like benefits administration, payroll, and taxes. |
Brokers usually only provide you with access to a customer platform to compare or renew health insurance policies. |
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:
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.
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:
The flexibility of the QSEHRA makes it ideal for small employers seeking a high-quality yet budget-friendly health benefit.
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:
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.
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.
3. Zywave - 2024 Employer Survey