Bracing for Obamacare, Some Businesses Try PEOs

ESCO Communications, an Indianapolis-based audio/visual equipment installer, has provided health insurance for its 100 employees
for more than 40 years, but when CEO Chip Roth was faced with 40
percent price hike on the company’s plan last year, he realized he
needed to make a change. The cost increase–coupled with expected
complexities of the Affordable Care Act, often referred to as Obamacare–led
Roth to WorkSmart Systems, a local professional employer organization
that pools health benefits for the employees of 200 small companies.
“Health insurance was the real driver,” Roth says. “By joining a
larger pool and spreading the risk around, we were able to keep our
rates the same as they were.”
With insurance premiums on the rise and health reform kicking into
high gear, many small companies are looking for strength in numbers.
Some are joining PEOs so they can provide a menu of affordable health
plans to their employees, and outsource the complex administrative tasks
associated with them. Matt Thomas, founder and president of WorkSmart,
says his company is on track to double its sales in the three years
ending in December 2015. “A lot of that has to do with the Affordable
Care Act,” he says. “Even larger companies that wouldn’t normally look
at PEOs are looking now, so they can avoid some of the ramifications of
[the law].”
PEOs, available for the past 30 years, provide health benefits and handle
human resources tasks, including payroll, workers’ compensation
insurance and other benefits. And because a PEO does all of this for a
group of companies, rather than just one, it can typically achieve
economies of scale that individual companies can’t. The most recent data
indicates that the sector is growing: PEO industry revenue reached $92
billion in 2012, a 13.6% increase over 2010, the year the health
legislation was signed into law, according to the National Association
of Professional Employer Organizations in Alexandria, Va.

PEOs generally charge a flat monthly fee per employee or paycheck, or
they take a percentage of each client’s total payroll. If a PEO does
its job well, it should generate enough savings for their clients to
offset those fees, says Jay Starkman, founder and CEO of Engage PEO in
St. Petersburg, Fla. “Insurance companies reward the aggregation of
[employees], so oftentimes PEOs are able to deliver a 5 percent savings
to their clients,” on health care, he says.

PEOs also say they save small companies the hassle and cost of hiring
their own in-house HR staff, who could cost more than $80,000 a year in
salary and benefits a piece. “A PEO does all the stuff that’s not
essential to your core business,” Starkman says.

There can be drawbacks to joining PEOs, however. Because a PEO acts
as a co-employer, you may feel as if you’re losing some degree of
control over your employees. And how competitive a rate your PEO gets
for health insurance will depend on the overall demographics and health
status of all the employees it is insuring–factors that are out of your
control and that will likely change over time.

A big reason PEOs are seeing a bump in interest these days is that
many small companies simply need help wrapping their brains around the
new health law, says Pat Cleary, CEO of NAPEO. All companies with 50 or
more full-time employees will have to offer health insurance, but the
intricacies of complying with the law can be hard to navigate. “The
perils and pitfalls that are in there for any small business are
significant,” Cleary says. “The biggest advantage, in my view, of going
to a PEO is to be able to say, ‘Figure this out for me.'”

Frank Romero, chief revenue operations officer of Evanston,
Ill.-based Grocer Exchange, a network of independent supermarkets, says
he’s more comfortable with health reform since he signed on with Engage
PEO in January of this year. “The owners of our supermarkets, which are
typically manned at a rate of 30 to 40 people per store, need this,
because they can’t afford to do this administration themselves,” Romero
says. “And the PEO brings to the table benefits savings that they could
never get themselves.”

 

Entrepreneurs considering a PEO can check out NAPEO’s website for a full checklist.