How to Free Yourself from PEOs

The handcuffs are off. Previously, companies faced FICA/FUTA tax penalties if they wanted to leave their PEO “off-cycle”, or mid-way through a plan year. But, this is no longer the case.

So what does it take to get off a PEO and regain control of your payroll and benefits?

Payroll

Key questions:

  • Do you want something that just works? (“No one gets fired for going with ADP”)
  • Do you want an “all-in-one” solution – buyer beware, you may get mediocre features on everything.
  • Do you want a system that’s easier to setup and implement? Look at some of the newer options out there: Paylocity and Ultimate Software are good solutions depending on your budget.

Tip:

  • Setting up payroll is the task that takes the longest. Make sure you decide on this first, and check out this table of the various options out there. Always negotiate the PEPM pricing and understand how it will integrate with the other systems you’ll want to put into place.

Retirement

Key questions:

  • What are you more interested in—a good brand or the lowest asset fees?
  • Do you want a passive, active, or ‘robo’ advisor model?
  • Do you have employees who qualify as highly compensated under current IRS guidelines?

Tip:

  • Understand the sophistication of your workforce. If employees want to retain some control over their investment decisions, you may want to decide on a blend of active and passive.
  • Model the fees with your company growth expectations and estimated assets under management to understand the financial impact.
  • Think about whether a 401k, or other alternative savings vehicle (like a SEP IRA) would be right for your group.

Workers Comp

Tip:

  • Do your homework and actively negotiate pricing. Coming off a PEO, your worker’s comp should be considerably lower, and you can realize cost savings if you navigate this process effectively. (Hint: Lumity can help)

HRMS/HRIS systems

Key questions:

  • What are your specific needs for your HR org? Performance management? Onboarding?
  • How does your HR system communicate with payroll? Does it need to?
  • Can your payroll system handle your HR needs? Does it have built-in functionality?

Tips:

  • HRMS systems are anywhere from lightweight to robust-featured. If you’re a small but growing company, a solution like Workday is probably overkill. There are other companies that marry payroll + “HRIS” together into one. Namely and Zenefits occupy this space. Buyer beware—All-in-one can sometimes be a master of none. Make sure you’re choosing a vendor based on the specific needs you have, not the ones they’re selling you.
  • If you already have a system of payroll record your finance team prefers, you may want to optimize for payroll since it’s the record-keeping system with the biggest executional risk attached to it.
  • If your company is larger and you need an intermediate step, consider an ASO option or administrative services organization. This type of organization, especially for larger companies that have longer lead-times to migrate but still want to realize cost savings, manages many of the functions of outsourced HR.

Health plans & benefits

Key questions:

Tips:

  • PEOs have their hidden fees. When you’re ready to migrate, make sure your broker negotiates health plan rates that are competitively priced for your group.
  • If you have an accurate picture of your group health profile, you should be able to determine what a “fair” rate is.

A word of caution

Lastly, don’t cancel your PEO contract until you have everything in place. You don’t want to create gaps in coverage where you’ll need COBRA.

Let Lumity (or your current broker) do the heavy lifting. From vendor evaluations to plan design and integrations, your role should be to make the mission-critical decisions with the information and data insights your broker provides you. We’re here to provide a free consultation if you could use additional guidance.