Could a PEO Cure Your ACA Headache?

For some companies, it might be a way to avoid confusion over new regulations.

More than four years after the passage of the Affordable Care Act, small businesses continue to feel the impact of the legislation. An estimated 80 percent of small businesses with group health plans will see higher-than-average renewal rates this year. Six percent of those will experience increases greater than 40 percent, and companies whose staff includes a high number of young males could see even higher increases.

Where your company’s rates land depends on where your employees fall within the community rating bands—but very few small businesses will escape significant increases. These companies also face complex reporting and compliance rules under the ACA.

Because of all the changes, smaller companies may look to professional employer organizations (PEOs) as one way to both keep health care costs under control and alleviate the confusion and time demands of adhering to the ACA regulations. Besides arranging for health coverage and handling ACA requirements, a PEO can manage other benefits, payroll and HR functions.

How Do PEOs Work?

Many small companies aren’t aware that PEOs exist or don’t understand how they work. When a small business hires a PEO, the PEO establishes a “co-employment” relationship with that company’s workers, which places those employees into the PEO’s larger group platform. (This is done so the PEO will meet the IRS definition of an employer.)

Does that mean a small business gives up control of its own work force? Not in practice. As part of its contract, the PEO agrees to name an on-site supervisor—usually the business owner—to handle the direction and control of the employees at the work site.

The on-site supervisor (the owner) is responsible for hiring, setting wages, terminations and other day-to-day responsibilities. The small business and the PEO share liability for compliance and reporting under government regulations.

By pooling the work forces of several companies, this model enables smaller businesses to deliver benefits on par with big employers, as well as amenities such as online enrollment and dedicated customer service representatives employees can call with questions.

Companies that use PEOs also remove themselves from HIPAA violation concerns, because the PEO takes care of handling employee information under the ACA.

No matter what kind of health benefit plan a small business offers, rate volatility always exists. But, historically, over a 10-year period, a PEO’s health insurance rates tend to be more predictable, which holds the potential for cost savings.

Tips for Choosing a PEO

Employers with 50 to 99 employees face the same ACA compliance requirements as a company with 300 employees does, but typically lack the resources to address those requirements. A PEO can work well for employers of this size—though smaller and somewhat larger companies also can benefit from working with a PEO.

When considering a PEO, look for one based in your metropolitan area, rather than a PEO that has a few local people but is based elsewhere. Locally owned PEOs usually are quicker to act and more flexible. For example, if you’re already happy with your workers’ comp insurance, a locally based PEO may not require the company to move that particular package to the PEO.

Business owners also should look for a PEO that allows a reasonable exit if, for example, the company grows beyond the need for a PEO and wants to withdraw from the contract.

Be cautious that the company you’re talking to is really a PEO. Only a co-employment relationship between the business and a PEO enables the PEO to bring the small company’s employees into its larger group policy. Without this structure, a company claiming to be a PEO really isn’t.

The co-employment concept concerns some small businesses, because they have the sense that they’re somehow giving up managing their own employees. This isn’t the case. The small business still makes all hiring, firing and employee management decisions. What business owners “give up” are the hassles of dealing with issues such as payroll, benefits and regulatory compliance. If they have employee disciplinary matters or other HR issues, the PEO is a resource to help, just as an internal HR team would be.

A PEO provides competitive benefits for employees and allows employers to focus on growing their businesses and earning a profit, rather than being bogged down in ACA and other regulatory requirements. It’s the best of both worlds.