PEO vs. ASO - Which Model is Right for Your Business?

PEO vs. ASO. Using either of these business models means that your company is considering or has elected to outsource some or all of your Human Resource requirements. We would like to take this opportunity point out the key differences in these service deliveries to help you determine which is the best solution for your business.

What is a PEO?

A PEO is a Professional Employer Organization. PEO's provide payroll and tax filings, employee benefit plans, workers' compensation, human resource management, and in some cases retirement plans to their clients under a "co-employment" arrangement. Under this structure, the employees of the company are paid and reported under the FEIN of the PEO and are technically "leased" back to the employer as worksite employees. The PEO is responsible for all payroll taxes, state and federal unemployment taxes, and compliance reporting while the employer maintains responsibility for day to day supervision of the employees. The PEO is also the sponsor of employee benefit plans and workers' compensation insurance provided to the worksite employees and the client company is limited to the insurance carriers used by the PEO.

What is an ASO?

An ASO is an Administrative Services Outsourcing company. ASO's provide all of the same services as a PEO, however the employees are paid and reported under the FEIN of the client company. An ASO administers all payroll taxes and state and federal unemployment taxes under the SUTA and FUTA accounts of the client company. Employee benefit plans and workers' compensation insurance are provided through the "open market" allowing the client to choose from insurance carriers of their choice or remain with those currently in place.

Does the size of my company matter?

The average PEO client nationally has less than 20 employees. This would imply that the PEO model is best suited for start-ups and small employers that do not have any human resource professionals on staff. The economic values of the PEO model start to erode as a company reaches 30 or more employees.

The ASO model is designed to replace the PEO model as companies reach 25 to 500 + employees. An ASO client may have some internal human resource professionals on staff as they reach 75 or more employees, however part of the strategic benefit of the ASO model allows an employer to maintain lower staffing levels by outsourcing administrative requirements.

If I use a PEO am I in their "insurance pool"?

Most PEO's sponsor and maintain master insurance policies for employee benefit plans and workers' compensation. As the majority of workers' compensation insurance carriers do not work with PEO's for various reasons, these options are very limited in most marketplaces. A common misperception amongst PEO clients is that they are in a "pooled arrangement" under these policies, and that all clients get the same premium rates regardless of their own claims experience. Our experience with PEO clients shows that this is clearly not the case. Group healthcare renewals are based upon the clients individual demographics and claims experience data and can vary widely between clients using the same PEO. The same criteria is used with workers' compensation, and in most cases even a client with excellent claims experience and a low EMR will only be getting standard manual rates through the PEO policy. In addition, many small employers with less than 50 EE’s have entered into a PEO relationship in hopes of receiving insulation against large healthcare increases. This is no longer the case as under the ACA employers with less than 50 EE’s are no longer subject to underwriting and all premiums are based strictly on age and demographic information.

What are the benefits of the co-employment arrangement?

This has become a difficult question to answer. Since the PEO is reporting the client's employees under their FEIN, the PEO does in fact maintain a sole fiduciary role for payroll and unemployment tax filings. In the current environment payroll service providers and ASO's will assume a fiduciary role for these liabilities as well. As for other employment related risks, there can be a perception that if an employee files a discrimination, harassment, or wrongful termination claim the PEO will be the responsible party. The PEO client service agreement indemnifies the PEO from these and related liabilities, however they may be required to file answers to these types of complaints.

With regards to employee benefits, small employers (< 10 EE's) can obtain ancillary benefits (short and long term disability, dental, life insurance) through a PEO that could not otherwise be obtained at this employee size. From a pricing perspective, group health premiums in the open market are very competitive and in many cases more competitive than those through the PEO's plan. In most cases workers' compensation through the PEO is provided at standard manual rates. The open markets for work comp coverage are currently somewhat soft and if the client has reasonable claims experience coverage can be provided with discounts of 15-20% off of the manual rates.

Potential advantages of the co-employment relationship are offset with many disadvantages which can include paying higher state unemployment rates under the PEO account and duplication of payroll taxes should the client elect to exit the PEO relationship other than at calendar year end. Another disadvantage is being limited to the insurance carriers who contract with a PEO as many carriers, including Blue Cross Blue Shield of IL for example, will not.

How do the costs compare between the PEO and ASO models?

Most PEO’s include or “bundle” their administrative services fees as a % of gross wages, which is typically between 2% - 3.5%. This means that a 25 employee company with gross wages that average $50,000 per EE is paying an administrative service fee of $125 per employee per month based upon a billing rate of 3%. PEO’s can also include state unemployment taxes in their billing rates that may be higher than a client would pay under their own account. As a general rule PEO’s cannot accept commissions on employee benefit plans since they are the co-employer. Depending on the “bundling effect” of the additional charges on all wages, the fee structure often ends up closer to $150 and can reach over $200 per employee per month.

Most ASO’s include their administrative fees as a flat $ amount per employee per month, which is typically between $50 - $100 depending on the client size and servicing needs. ASO’s offer a more flexible service delivery and in many cases may only charge the client for the services they require. Most ASO’s also act as employee benefits brokers and receive commissions on employee benefit plans. This allows an ASO to charge a lower administrative service fee and offer a net cost reduction to the client. As these fees, all insurance premiums, and payroll taxes are broken out by line item the client can easily identify exactly what they are paying. This level of transparency is a very attractive component of the ASO model.

Why do PEO's "bundle" their charges as a % of wages?

There is no legal or statutory rule that requires a PEO to charge for their services as a % of wages. The reason why is very simple. Including their administrative / services fees as a % of wages benefits the PEO in the following areas:

  • The % applies to all additional wages including overtime, paid vacations, bonuses, and other forms of compensation paid.
  • The % increases as compensation increases are granted annually.
  • Including unemployment and workers' compensation (and employer benefit contributions in most cases) as a % of the billing can make identifying the actual PEO expense extremely difficult.
  • When employer benefit contributions are bundled into the billing rates, the client is paying a premium on these charges as well based on the above.

View PEO vs. ASO comparison chart

Conclusion

The service delivery to the client effectively looks and feels the same under both models. For small employers who may be unable to obtain certain benefits on their own, or who may have been assigned to the workers' compensation state risk pool, there can be a cost advantage under the PEO model if a PEO is willing to cover them. There is otherwise a compelling cost advantage when using the ASO model for employers with over 25 and certainly over 50 Employees. 

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