Why Use a PEO for Employee Benefits?

HR leaders at small businesses have a lot on their plates. Between payroll, hiring, employee relations, and everything else HR oversees, most don’t have a lot of bandwidth to devote to benefits administration.

That’s why many small to midsize businesses turn to PEOs to help manage employee benefits.

A Professional Employer Organization (PEO) can help small to midsize businesses manage their employee benefits more efficiently, freeing up valuable time and resources. By supporting day-to-day benefits admin – along with many other HR tasks like payroll and compliance – PEOs make it easier for small teams to offer competitive benefits as their business grows.

But while PEOs may be a great support for some small businesses, not all employers are well-suited for a PEO. Every business is unique, so it’s important to assess your options and understand the pros and cons before committing to any one solution.

Read on to learn why you might (or might not) want to use a PEO for employee benefits administration.

What is a PEO?

Let’s start with the meaning of PEO. PEOs are organizations that offer a unique form of human resources outsourcing and benefits administration through co-employment.

When you join a PEO, your employees technically become their employees for administrative purposes. The PEO then takes over tasks like enrolling employees in benefits, running payroll, and maintaining compliance with employment and labor laws.

Because PEOs work with multiple businesses, they end up co-employing hundreds (or even thousands) of workers. This enables them to approach benefits providers with the purchasing power of a large enterprise.

PEOs put together pre-built benefit packages for their partners to choose from, which usually include some combination of:

• Health, vision, and dental plans
• Life and group life insurance
• Disability insurance
• Tax-free savings accounts, like an HSA, FSA, or HRA
• Tuition reimbursement
• Mental health benefits
• Commuting or travel assistance
• Dependent care

Although these benefits packages are usually easier to roll out to employees, they leave little room for any personalization. If your employer wants to offer benefits that are tailored to your employees’ unique needs, PEOs may not be the best option.

What benefits admin tasks can PEOs support?

One of the biggest reasons why small businesses choose PEOs is for benefits administration support. And when you have a small HR team, that extra support for time-consuming or complex ben admin tasks can make a big difference.

Here are some ways that PEOs support benefits administration.

Health Insurance Plans

With a PEO, you can access better group rates for employee insurance plans, like medical, dental, and vision. And they do all the legwork to vet insurance plans from the companies they work with, so you save hours that you would otherwise lose to researching employee benefits options.

PEOs will also typically help with employee enrollment for benefits and claims processing. Many have dedicated phone lines or other points of contact for employees with questions about their coverage.

Retirement Plans

You may already offer your employees 401(k) plans through a third party. If that’s the case, then a PEO can take care of any related taxes and payroll deductions. But if you don’t, you can use a 401(k) plan offered by the PEO

Compliance

PEOs employ benefits compliance experts who keep tabs on employment-related rules and regulations. Their areas of expertise could include:

• Payroll tax law
• Tax reporting requirements
• Worker’s compensation
• Benefits-related laws, like ERISA and COBRA
• HR and hiring regulations

They can build an action plan that helps your business stay compliant with changing rules, so you can avoid paying fines or incurring other penalties.

Other HR Support

If you don’t already have a human resource information system, a PEO may be able to provide you with one. And they can help you with additional HR tasks, including:

• Creating employee handbooks
• Providing training
• Developing job descriptions
• Recruiting
• Managing employee performance
• Property and casualty (risk management)

What makes an employer well-suited for a PEO?

Some startups and small businesses can benefit from working with a PEO as they grow.

Here are some signs that your employer might benefit from working with a PEO:

• You have a very small HR team — or even an HR team of one.
• Your team is strapped for bandwidth, and needs more time to focus on building your business.
• Your business is very new and still growing, with less than 100 employees.

What makes an employer not well-suited for a PEO?

Some small businesses can benefit from working with a PEO – but not all. In fact, working with a PEO may end up costing some businesses more time and money than it’s worth.

Here are some signs that a PEO may not be the best choice for your employer:

• You have 75+ employees.
• You want to build a benefits offering that is highly customized to your employees’ unique needs.
• You prefer to manage benefits, payroll, or other HR functions in-house.
• You may be uncertain about long-term business plans (or anticipate significant changes in your workforce size), and hesitate to commit to a long-term contractual agreement.

One key thing to keep in mind: PEOs charge ongoing fees for the administrative services they offer. How much you’ll pay depends on the number of employees you have and which PEO services you opt into.

On average, working with a PEO costs businesses $1,395 per year, per employee. Depending on the size of your business, you may end up spending more on admin fees than you save on benefits.

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Pros of using a PEO for employee benefits

Why use a PEO? If you’re well-suited for a PEO, it could have several upsides, including better employee benefits, time savings, and easier compliance maintenance.

Potential cost savings for employee benefits

By using a PEO, small business owners gain access to benefits at lower rates than they could acquire on their own. Depending on the number of employees you have, you may be able to save money on benefits.

(But keep in mind that depending on the number of employees you have, those cost savings can quickly become offset by administrative fees.)

Save time during healthcare renewals

Searching for quality benefits is a time-intensive process. You have to vet companies, compare rates, and educate yourself on what’s included in each plan — then do it all over again the next year.

Similar to benefits brokers, PEOs work with benefits vendors and know what each one has to offer. The biggest differentiation between PEOs and brokers: PEOs provide pre-selected benefits offerings.

Their pre-built benefits packages take all the guesswork out of shopping for coverage. They also help with employee enrollment and can answer any questions about benefits that come up.

Maintain compliance

PEOs are experts on benefits compliance, so you won’t have to keep up with changing regulations or worry about penalties.

Disadvantages of using a PEO for employee benefits

PEOs aren't for everyone — and there are tradeoffs that any company needs to accept when committing to a PEO.

Not cost-effective for some companies

Depending on their number of employees, start-ups and small businesses may be able to save on insurance rates and other employee benefits by using a PEO. But as businesses grow, PEO services become more and more expensive. At some point, the money you save by using a PEO is no longer worth what you pay in admin fees.

Lack of customization

PEOs offer pre-built benefits packages, which works for some businesses. But in today’s tight labor market, the benefits you offer employees can make or break your recruitment efforts. And you can’t stand out from the competition by advertising the same benefits package as every other company that works with that PEO.

On top of that, benefits offerings are only as valuable as they are helpful to meeting your employees' needs. Your employees don't all have the same health or lifestyle needs — and they may not all find the same value in the same benefits plan.

If you want a benefits package that can support a wide range of health and lifestyle needs, then using a PEO for benefits may not be your best option.

Less administrative control

You give up a lot of control as a business owner by working with a PEO. For a start, PEOs partner with specific benefits vendors, so you won’t be able to pick your own. Plus, you may need to switch away from HR software or technology you already use.

PEOs also take over a lot of day-to-day admin tasks, like payroll and benefits enrollment. If you prefer handling those tasks yourself, then a PEO may not be the right fit for your business.

What are some other options for easy benefits administration, outside of a PEO?

PEOs can be a good fit for some — but not all — businesses. Working with a PEO may be too expensive for your business, or you may want more benefits customization than they can offer. Whatever your reason for passing on PEOs, you still have options for easy benefits administration.

Benefits brokers are licensed insurance professionals that specialize in employee benefits. They work with you to build a customized benefits package for your business, which accounts for your business operations and goals, workforce needs, budget, HR strategy, and IT concerns.

Brokers don’t just support employees through the enrollment process. They’re also there year-round to answer employees’ questions about benefits, point them to resources, and solve any problems that come up.

A great broker will also collaborate with your HR department year-round, handling benefits-related admin tasks. At Nava, we take on these tedious back-office tasks so that your team can focus on doing what matters most for your business.

We also offer a money-back performance guarantee — a first in the industry. If you’re not satisfied with how we’ve delivered on our plan by the end of the year, we’ll refund your fees, no questions asked.

See why hundreds of growing businesses trust Nava with their employee benefit plans. Get started here.