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The Unexpected Costs of Using a PEO for Health Insurance

Running a business is not a cost-free endeavor, every dollar counts. Businesses are sometimes under the impression that PEOs are saving them money on health insurance, but that’s usually not the case. There are two primary areas businesses are typically unaware of when evaluating the cost of their PEO and Health Insurance costs.

Health Insurance Direct & Indirect Cost

PEOs often sell themselves based on the idea that they are able to reduce health insurance premiums by “pooling” many employers together, thus keeping the cost of medical coverage down. While there is frequently a savings to the health insurance premium alone, the savings is typically dispersed into other administrative fees

PEOs have administrative fees that range from a few hundred to a few thousand dollars per employee. These fees have names from “HR Technology” and “Workers’ Comp Admin” to our personal favorite: one large PEO has a fee named the “Markup Fee”. These large fees have the ability to account for the health insurance premiums being lower.

In addition to the hard costs, businesses are required to pay an indirect cost: lack of control. When it comes time to either renew the coverage the company is at the mercy of the PEO and in the event of a large renewal increase (10%+) without an alternative. If a company with over 50 employees leaves a PEO, it can be difficult to get competitive health insurance rates without claims data for the shopping process. Also, when a company with over 50 employees inevitably leaves a PEO due to the increased fees, it can be difficult to get competitive health insurance rates without claims data for the shopping process.

Hidden Costs

It is also hard for a company to decipher the total cost of their PEO due to hidden fees & confusing invoices. Things like State Unemployment Insurance (SUI) & Work Opportunity Tax Credits (WOTC) are hardly ever realized as a cost for a company with a PEO. However, companies within a PEO typically have much higher SUI rates. Some PEOs don’t even cap SUI payments at the first $16k of an employees’ wages. Also, if a company would be eligible for a WOTC, it almost always goes to the PEO rather than the business.

Additionally, if you have highly paid individuals, or give your staff bonuses, you may be surprised to know that you will be giving your PEO a bonus as well; being that many PEOs charge based on a percentage of payroll.

What can you do?

Many businesses are drawn to PEO plans under the assumption that you will be saving money. However, this oftentimes isn’t truly the case. Don't let the unexpected costs of a PEO hurt your bottom line. Take a look at your invoice in an effort to measure the total cost of your PEO. If you need any assistance breaking down the fees and other costs, 19:21 is here to help.


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