A professional employer organization, otherwise known as a PEO, is an entity that enters a co-employment agreement with the clients, becoming the employer of record for their companies. Essentially, when a company enters into the co-agreement, their employees are leased to that PEO.
Often, this is not a preferred way for businesses to manage their functions.
Leaving a PEO may seem daunting, but together we can help you – or if you’re a benefits broker, your clients – have a smooth transition out of a PEO by following the steps below.
1. Read the Contract
Before you take the first step to terminate a PEO arrangement, read the contract and understand termination requirements, dates, penalties, and costs.
2. Select Your Experts and Partners
When an employer exits a PEO, all office administration and human resource responsibility falls back on them. They should be sure to:
- Identify and select a payroll company.
- Identify and select a COBRA compliance administrator.
- Identify and select a pre-tax account administrator (FSA, HRA or HSA), if applicable.
- Select an employee benefit and property, and casualty broker.
- Select a benefit enrollment and administration system.
3. Collect Data
It is very important to collect data prior to the termination letter being sent to the PEO. Employers should gather:
- Company gross to net for taxes, deductions, and earnings.
- Employee gross to net for taxes, deductions, and earnings – both active and terminated.
- Compensation information (salary/hourly and rate of pay).
- Census – name, address, SSN, marital status, dependents, birth date, gender.
- Live vs work state, if applicable.
- Copies of court orders, wage garnishments, and tax levies.
- Employee time off/accrual balances.
- List of all COBRA participants and those in their election period.
- FSA participant balances, if applicable.
- HRA participant balances, if applicable.
- YTD ACA tracking.
- Copies of performance evaluations.
- Copies of termination records.
4. Initiate Employee Paperwork
Employees will need to complete the following since they will be paid under their company’s FEIN (no longer under the PEO’s FEIN):
- Direct Deposit
- Federal and Tax Withholding Forms
- New Employee Handbook
- Benefit Program
5. Set Up Payroll, Including Taxes and Deductions
Before working with your client to set up payroll, you need to identify what ripple effect the transition may have. First, check if the PEO is certified by the IRS by clicking here.
If the PEO is certified (sometimes referred to as a CPEO), employers won’t have to restart wage bases (FICA/FUTA) and Social Security/Medicare will not reset. If it is not a CPEO, the employer may want to consider a 1/1 effective date when the wage base resets for these taxes.
- Load applicable year to date tax and payroll deduction data into payroll.
- Establish imputed income codes and rules for group term life, disability, and domestic partners.
- Set up any court-ordered deductions, wage garnishments, and tax levies.
- Set up deduction codes (pre and post-tax)
- Set up recurring pay codes
- Set up processing schedule (work week, processing date, delivery date, check date)
- Set up company structure (location, departments, etc.)
- Consider cost center allocations, if required
- Configure general ledger integration with file fee to import into financial software.
Consider running a parallel payroll the first time before terminating the PEO administration.
The employer will need their federal and state tax ID numbers. They will need to know if they are in a PEO State Unemployment Tax Act (SUTA) employer (pass-through) state? If in a PEO SUTA state, the SUTA will restart.
Employers will need to:
- Obtain federal and state withholding accounts.
- Obtain State Unemployment Tax (SUTA) ID and tax deposit accounts.
- Obtain Federal unemployment tax account (FUTA).
- Obtain Federal Employer Identification Number (FEIN) if you did not previously have one.
- Establish any local tax withholding accounts.
Know the PEO leave policies before and how these policies are affected when the PEO is terminated.
Gather the following for your clients to help them move forward:
- Develop non-exempt policies for overtime, meals, rest periods, failure to punch in and out correctly, etc.
- Determine leave accrual policies and how to track time.
- Implement, configure and learn a new time and attendance system, if you have hourly employees.
- Load balances into the new system.
- Verify the accuracy of all time off accrual formulas.
6. Ensuring Benefits & Insurance
In today’s competitive labor market, it is important to have employee benefits.
Plan deductibles will reset with a new health and dental insurance. When designing the new benefit program for your client, consider the PEO’s plan deductible and what cost their employees may have already incurred.
If the prior plan was a fully or partially self-funded, it may be a good idea to continue to pay administrative fees until all claims have been paid.
- What benefits need to be offered?
- Define the contribution structure.
- Define eligibility.
- Check state laws regarding disability requirements.
- Obtain a report that shows what amount towards the deductible has been met if the new policy will provide deductible credit.
FSA | HRA Plans
It is important to know if the PEO will continue to process claims. If not, will the new FSA administrator take over claim administration? It is important to:
- Understand how balances will be handled with the FSA.
- Communicate the transition as soon as possible to the employees to outline the spend-down period.
- FSA is a COBRA benefit if there is a positive balance.
- Select a new FSA administrator.
- Obtain an FSA | HRA balance report from the PEO if the change is occurring during the plan year or the new administrator will be paying run out claims.
Employees will experience a blackout period where they can’t make changes. Employers may also face some termination fees. It is important to:
- Select a 401(k) administrator.
- Identify a fiduciary
- Select funds.
- Establish a Workers Compensation policy.
- Load worker compensation class codes and rates into payroll and identify any officers that will be exempt from coverage.
- Obtain an employment practices liability insurance policy.
7. Understanding Compliance
Since employment with the PEO is ending, COBRA notices must be sent.
A PEO may charge large fees to manage COBRA; refer to the contract for details. To avoid hefty costs, employers should have a benefit plan in place and request to be reimbursed for the PEO COBRA fees after 60-90 days.
Keep in mind a carrier may have issues with COBRA participants if they are considering the employing company as new. Be sure to:
- Select a COBRA administrator.
- Send Initial Right Notices to employees electing new company benefits.
- Notify current COBRA participants of new COBRA administrator.
Affordable Care Act (ACA)
If you are an applicable large employer (ALE), it is important to:
- Select an ACA solution for tracking and reporting requirements.
- Load year-to-date hours worked into the new ACA platform.
- Run the numbers and ensure affordability and participation requirements are being met.
- Prepare and distribute new ERISA Wrap documents containing all language pertinent to a new benefits program. Include all required health care notices.
- Complete Form 5500 filing, if 100 or more participating in health and welfare plans at the beginning of the plan year.
8. Implementing HR Policies & Administration
Human resources play a huge role in shaping a company. HR functions help keep the business compliant and employees happy. You should:
- Define roles and responsibilities for HR, payroll, benefit administration.
- Establish a recruiting process that adheres to all requirements, such as recordkeeping and proper interview format and questions asked.
- Create an employee handbook and have it reviewed by legal counsel. Complete this before the PEO relationship is terminated and the paperwork is ready to go.
- Have all plan documents written and reviewed, ERISA Wrap, health notices, exchange notices, etc.
- Establish a compliant Leave of Absence policy. Refer to state laws.
- Establish a compliant HIPAA policy.
- Define the process for FMLA administration, if applicable.
- Determine if the company needs to adhere to an affirmative action plan, if applicable.
- Design company structure with departments, divisions, classes, etc.
- Establish a workflow for onboarding new hires and handling paperwork, tax forms, Forms I-9, employee handbook, required notices, etc.
- Establish a workflow for employee changes and terminations.
9. Creating a Technology Solution
Integration between payroll and benefit administration will create efficiencies with these administrative tasks. Discuss and outline what you will need in the system such as applicant tracking, new hire onboarding, performance management, time and labor management, reporting structures, cost centers, voluntary products, etc. Be sure to:
- Load compensation history.
- Identify an online learning and training platform to comply with safety training and state-mandated training such as sexual harassment.
- Maintain HR files online and determine what employees will have access to and what employee self-service will be offered.
- Design benefit eligibility and life event change requests with approval criteria.
Download Your Own PEO Transition Checklist
How PrimePay Can Help
PrimePay helps with the administration of pre-tax benefits for your company, including HRAs, HSAs, and FSAs. When you choose PrimePay’s pre-tax benefit plan administration, you receive a dedicated service team, access to our support portal, automated claims processing, and a PrimePay debit card and mobile app.
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