What is the disadvantage of a PEO?

Organizations may consider leaving a PEO for reasons including: the fees are too expensive, the benefits aren’t meeting employee needs/the benefits are too rigid, customer service is lacking and other reasons. Businesses can explore other options, such as a group health insurer with HR partners that provide similar benefits with better prices and customer service.

Why is PEO so expensive?

PEOs can quickly become expensive because they typically charge a percentage of total payroll and/or a fee per employee per month. As companies grow, they may be able to achieve better savings with a different solution, compared to a PEO.

How do you transition out of a PEO?

To leave a PEO, you’ll first want to determine next steps for functions like employee benefits, HR and payroll. Your turnkey solution provider can help facilitate exiting, or your business can gather stored company and employee information and contact the PEO to begin the exit process per your contract terms.

What happens when you leave a PEO?

PEO contracts may stipulate terms for items like advanced notice requirements, fees and other termination requirements. Once you leave the PEO, you’ll retain control of all HR functions in-house and can transfer them to a new partner, if desired.

What are the benefits of leaving a PEO?

Some of the benefits leaving a PEO might provide include cost savings, more choice for health coverage for employees, personalized customer service and simpler HR services.

Signs Your Business May Be Outgrowing Its Professional Employer Organization (PEO)

June 25, 2024

For some businesses, using a professional employer organization (PEO) to outsource human resources (HR) functions makes sense. A PEO can manage tasks including benefits, payroll, workers’ compensation and employee training. This can free up time and resources for businesses, though the investment is often significant.

Some businesses may find a PEO works for a certain amount of time, but then the costs don’t make sense, especially when a business starts growing and could save money with other solutions.

In this article, learn the signs you may be outgrowing your PEO and why leaving one could be financially advantageous, as well as provide other advantages, like better employee benefits and customer service.

Key Takeaways

PEOs make sense for some businesses, but not all. Companies that are currently using a PEO should examine if they still need one, especially as they grow.
Moving away from a PEO to a turnkey group health insurer solution with HR partner functions can dramatically lower expenses on things like administration fees, especially for employees who don’t use all PEO services.
Compared to an organization exiting a PEO on their own, which can become complicated quickly due to complex systems and lack of transparency, it’s easier and often less expensive to use a turnkey solution that combines group health insurance services and HR functions.

A group of people are sitting at a table drawing with pencils.

What to Consider With PEOs

PEOs may be a good initial solution for businesses that need outsourced HR, but over time, they can make business operations more complex and expensive. Some things to consider with PEOs include the following.

Fee increases: Every year, it’s likely that PEO fees will increase, as increases are common due to inflation. This isn’t the only increase you can expect with a PEO. If your medical plan rates increase, as well, those are extra expenses in addition to administration fee increases.
Risk pool volatility: Initially, a PEO may have a great medical rate. But over time, especially as employees use their healthcare benefits, medical rates may increase dramatically due to an increased risk pool. At AZ Health Insurance Brokers, we tend to see large increases in PEOs over time, with some annual increases exceeding 35%, depending on the risk pool.
Extra administration fees: With PEOs, the business pays 100% of administration fees. With other types of group health insurance, administration fees may be a shared cost with another party, which saves the business money.
Lack of flexibility: PEOs usually only present a limited number of carrier and plan design options. As your workforce evolves, you may want the ability to choose different types of health plan coverage that your existing PEO doesn’t offer. Outside of a PEO, it’s easier for employers to get more tactical with their employee health coverage decisions.
Complex fees: In most cases, we see businesses don’t even know what they’re paying in PEO fees, or if they do, what kinds of benefits those fees provide, exactly. Generally, fees charge a percentage of payroll, and/or a fee of around $120 per employee per month for an administration fee. These fees are charged for each employee on payroll, regardless of whether or not they’re actually using the PEO services.

For smaller companies, especially those with employees who are located in multiple states, using a PEO can make sense. A PEO can relieve some of the burdens small businesses face associated with compliance and other HR functions.

But as companies grow, the fees and lack of transparency and flexibility may mean it makes more sense for businesses to move on from a PEO and find another solution. AZ Health Insurance Brokers offers a turnkey solution for exiting a PEO. We can help your business.

When Exiting a PEO Makes Sense

If your financial experts determine you’re spending too much with a PEO, and/or you want to get the same high-quality HR services without having to rely on a PEO, AZ Health Insurance Brokers can help. Here’s how.

Set up all health insurance coverage options for employees: At AZ Health Insurance Brokers, we specialize in business health insurance coverage for organizations of all sizes. We can present you with all medical coverage options for workers, and help you make an informed decision that meets the needs of your business budget and your employees.
Provide an extension of HR: We’ll also recommend best-in-class strategic HR partners, whose systems integrate with ours, to create a similar cohesive feel to the PEO without all of the administration fees. We can help you field staff questions and ensure medical plans and other employee benefits, like life insurance coverage, align with your company culture. We’ll help you create a solution not only for insurance, but also for 401(k) benefits, payroll, workers’ compensation and other HR functions.
Offer improved customer service: By aligning AZ Health Insurance Brokers’ group health insurance coverage with services provided by our HR partners, we remove most of the stress associated with pivoting away from a PEO. Most of our clients find the customer service drastically improves by choosing us as partners.

Wherever you are on your terms with your PEO, AZ Health Insurance Brokers can help you navigate the complexities of exiting one so you can use a simpler and more cost-effective solution. Contact us for a free consultation on how to exit a PEO.

AZ Health Insurance Brokers Can Help With PEO Exit Strategies

Many businesses stay with a PEO because the task of exiting can seem so daunting. At AZ Health Insurance Brokers, our turnkey solution for exiting a PEO has helped many of our clients achieve better group health insurance outcomes and lower costs, while retaining the same HR functions they had with a PEO.

We can step in to help with all HR verticals, including medical, payroll, HR, 401(k) deployment and more, and create an integrated solution and continuity among software. We can help your business deliver benefits employees want, while keeping costs low.

For more information, contact us online, call us at 602.617.4017 or email quotes@azhealthinsurancebrokers.com.

PEO Exit FAQs

What is the disadvantage of a PEO?
Organizations may consider leaving a PEO for reasons including: the fees are too expensive, the benefits aren’t meeting employee needs/the benefits are too rigid, customer service is lacking and other reasons. Businesses can explore other options, such as a group health insurer with HR partners that provide similar benefits with better prices and customer service.
Why is PEO so expensive?
PEOs can quickly become expensive because they typically charge a percentage of total payroll and/or a fee per employee per month. As companies grow, they may be able to achieve better savings with a different solution, compared to a PEO.
How do you transition out of a PEO?
To leave a PEO, you’ll first want to determine next steps for functions like employee benefits, HR and payroll. Your turnkey solution provider can help facilitate exiting, or your business can gather stored company and employee information and contact the PEO to begin the exit process per your contract terms.
What happens when you leave a PEO?
PEO contracts may stipulate terms for items like advanced notice requirements, fees and other termination requirements. Once you leave the PEO, you’ll retain control of all HR functions in-house and can transfer them to a new partner, if desired.
What are the benefits of leaving a PEO?
Some of the benefits leaving a PEO might provide include cost savings, more choice for health coverage for employees, personalized customer service and simpler HR services.