What is a PEO and what does it have to do with insurance?

Many companies often turn to professional employer organizations (PEOs) to handle various HR functions, such as employee benefits and insurance. This allows small organizations to focus on their core business operations while outsourcing certain administrative tasks to experts in the field. However, the relationship between PEOs and insurance can sometimes be confusing for those unfamiliar with the concept.

In this article, we'll cover how PEOs work and what they offer in terms of insurance coverage.

Takeaways from this blog post:

• PEOs can help small businesses access more competitive rates for small group insurance benefits such as health, dental, and vision.
• By sharing employer responsibilities through a co-employment model, PEOs can help reduce administrative burdens and provide better insurance options for small businesses.
• PEO insurance may seem like a convenient option for providing health insurance benefits, but HRAs offer a more cost-effective and flexible alternative.

What is a PEO?

A professional employer organization (PEO) is a company that provides comprehensive HR solutions for small to medium-sized businesses.

PEOs can handle tasks such as:

• Payroll processing for small businesses, including handling tax withholdings and end-of-year compliance like W-2s
• Benefits administration
• Processing workers’ compensation claims
• Human resource management (HRM) solutions like creating employee handbooks and helping with onboarding employees
• Compliance with labor laws

What does a PEO do for business health insurance?

One of the key services that PEOs offer is access to benefits, such as small group health insurance. PEOs can work with insurance providers to secure more competitive rates for these benefits, which can be a cost-effective solution for small businesses that may not have the bargaining power to negotiate on their own.

PEOs can provide access to the following types of insurance:

• Health insurance
• Dental insurance
• Vision insurance
• Life insurance
• Disability insurance
• Pet insurance

PEOs typically offer a co-employment model, where the PEO and the client share employer responsibilities. This can have implications for insurance coverage since PEOs may provide coverage for employees under their own policies. This can help small businesses get better insurance options and reduce the administrative burden of managing multiple insurance policies.

What does a PEO not do?

PEOs don't dictate pay rates, hours, or schedules. Additionally, a PEO doesn't provide product development, marketing, or sales strategy services. So, while a PEO can help streamline administrative tasks and provide HR support, they don't take over your business.

PEOs are sometimes confused with other outsourcing companies that offer similar services, such as:

• Staff leasing companies
• Employee leasing companies
• Managed payroll providers
• Human resources outsourcing organizations (HRO)
• Administrative services organizations (ASO)

What is the major benefit of using a PEO service?

On top of the potential cost savings with insurance, PEOs often act as the employer of record¹ for their client companies. This means they take on certain employer responsibilities, such as withholding payroll taxes and providing workers' compensation coverage. This can help alleviate some of the administrative burden for small business owners and allow them to focus on growing their business.

For health insurance, using a PEO can result in cheaper group rates because they can pool employees from different organizations together. Since this spreads risk across a larger group, they can negotiate better rates from insurance carriers.

But, there are some downsides to working with a PEO and offering your employees a group plan.

Is there a better alternative to PEO insurance?

Affordable health insurance coverage is hard to come by, especially if you're only looking at group plans that insurance companies offer directly. If you want a cost-effective, time-saving solution to offering a health insurance benefit, it's tempting to consider PEO insurance.

With a PEO, you give control of your health benefits to a third party. You’ll have limited flexibility to ensure your benefits meet the diverse needs of your workforce. Working with a PEO can also be expensive, especially if you have them take on multiple services. Finally, since PEOs offer group plans, you’re still at risk for annual rate hikes.

A health reimbursement arrangement (HRA) is a better alternative. HRAs are IRS-approved, employer-funded health benefits that allow employers to reimburse employees tax-free for their health coverage rather than buying it for them.

You simply set an allowance amount for your employees. Then, your employees purchase medical plans or healthcare services using their own money. They submit their expenses for reimbursement, and you reimburse them up to their allowance amount.

There are more than 200 HRA-eligible expenses, including:

• Monthly premiums for medical coverage
• Doctor's office visits
• Prescription drugs
• Over-the-counter medication
• Dental care
• Vision care
• Chiropractic care
• Mental health counseling

There are also several HRAs to choose from, making it easy to find one that's the best fit for your business. While the reimbursement process works the same, each HRA is different in terms of eligibility and contribution limits.

Two popular HRAs for small employers are:

• The qualified small employer HRA (QSEHRA): The QSEHRA is for small businesses with fewer than 50 full-time equivalent employees (FTEs). It allows employees to purchase individual health insurance policies or stay on a spouse’s or parent’s group plan. There are annual contribution limits with QSEHRAs, but companies can offer varying allowance amounts based on employee family status, such as single or married.
• The individual coverage HRA (ICHRA): The ICHRA is similar to the QSEHRA but with fewer restrictions. Employers of any size can offer different allowance amounts based on up to 11 employee classes, with no maximum contribution limits. However, employees must have a qualifying individual health insurance policy to participate. Offering an affordable ICHRA allowance can also help organizations with 50 or more FTEs satisfy the ACA's employer mandate.

With the ICHRA or QSHERA, your employees can purchase a plan through the federal or state health exchanges or with the help of an insurance broker. This gives them the flexibility to pick a health plan option that matches their preferred primary care physician or overall provider network. This also saves you from having to shop for a group policy and negotiate terms with an insurance carrier.

If you want to offer an HRA to your employees, PeopleKeep can save you precious time and money. Our team simplifies the process for you by handling documentation reviews and customer support. We also provide compliance expertise to keep your business in check with federal legal requirements.

Why is it important to offer health insurance benefits?

Salary isn't enough for most employees. Employers need a competitive benefits package to stand out to today's job seekers. PeopleKeep's 2024 Employee Benefits Survey found that 81% of employees say an employer’s benefits package is an important factor in whether or not they accept a job.

Additionally, 92% of employees view health benefits (such as health insurance plans or alternatives like HRAs) as important. While offering a health benefit can help improve job satisfaction at your organization, it can also keep your employees from looking for better opportunities elsewhere.

Conclusion

Overall, a PEO can be a valuable partner for small businesses looking to streamline their HR and insurance processes. Outsourcing these tasks to a PEO allows business owners to focus on their core operations and leave the administrative duties to the experts. However, an HRA may be the better health benefit offering for your business.

1. https://www.businessnewsdaily.com/16587-using-a-peo-for-health-insurance.html