It’s widely known that professional employer organizations (PEOs) are commonly used because they’re supposed to provide comprehensive HR solutions for small to mid-size businesses, but did you know that the average PEO client only has 19 employees? This means that if your company has well over that number of employees, you may not be using the best tools to manage your people. This is one of many misconceptions and myths surrounding PEOs that may be holding your business back from advancing to your next stage strategically and building a better in-house HR experience for your employees.
Let's take a look at how you can know when to consider moving your HR department in-house and several myths about transitioning off of PEOs that will likely remove some of the barriers holding you back.
Signs that it's time for in-house HR
Growth is the first of many signs it may be time to start considering moving HR in-house and utilizing an HCM solution. If your company is well over 19 employees and is moving into the hundreds, PEOs will no longer be able to grow with you and provide the support needed to continue succeeding.
Along with growth, another clear sign is when outsourcing components of your PEO solution is needed in order to meet the basic needs of your business — even if these are offered through your PEO. This includes recruiting, surveys, performance, and other similar areas, which leads to different parts of your people management strategy living with various companies instead of being all in one place if you start investing in point solutions.
Having everything in one place becomes critical as your HR team grows along with your company. As there are more people to manage, the HR workload may also grow enough to require multiple people to manage the tasks. As this happens, the more you can streamline the number of solutions you're using the more you'll ensure the success of not only your HR team, but also your overall business.
The 5 biggest myths about PEO transition
When your company has been managed exclusively through a PEO, it can initially be daunting to consider moving those tasks in-house even if you're at the stage where change is needed. It can be even more overwhelming when that task is coupled with concerns about date constraints, additional taxes, and the impact it may have on employees leading to unnecessary disruptions. That’s why we've outlined the five of the most common PEO transition myths that have created unnecessary roadblocks for organizations looking to make a change:
Myth: If I make the switch at any point of the year other than January 1, it will burden my employees with having to file two W-2 forms.
Fact: Many people looking to make the switch from PEOs think they have to delay the process and wait until the first of the year because otherwise their employees will have multiple W-2 forms. This perceived burden to employees is a myth and employees having to file multiple W-2s is not something that should hold your company back from moving HR in-house. According to the U.S. Bureau of Labor, the average American will hold about 12 jobs in their lifetime. Unless everyone is always starting a new job exactly on January 1st every time they change employers, they'll have to file multiple W-2 forms anyway. It's a very common practice that most employees have encountered at least once.
Additionally, since most in-house HR solutions integrate with online tax systems, employees can easily plug in the FEINs found on their W-2 forms and have all their information immediately populate.
Myth: If I move away from my PEO before or after January 1st, my federal wage base will not transfer and I will have to restart my federal taxes.
Fact: Understandably organizations who are interested in making a change want to avoid any added expenses where possible – even if that means delaying the process an entire calendar year to make the change on January 1st. The good news is that you don’t have to wait. No matter what date you make the change, if you’re currently with a certified PEO, your federal wage base should transfer upon request so you don't have to restart your federal taxes.
Myth: My employees will have to restart their taxes and it will be a burden to them if we make the transfer.
Fact: Thankfully if you have the support of a modern HR technology solution, this is not something employees will have to be concerned about. As seen with the previous myth, the right levels of automation will let you simply transfer these wage bases and not restart the tax for employees.
Even if there is a situation where an employee needs to restart their taxes, they will get any overage returned at the end of the year. This is because when they go to do their taxes, your in-house HR solution should recognize that they work for the same core employer and automatically recognize that the employee overpaid on state tax. Certified PEOs are typically co-employment relationships, which means that your company is listed along with the PEO and is reported duly under the same FEIN. That makes these changes easier for your new internal systems to identify.
Myth: I worked hard to obtain a better workers' compensation experience modification rating for my organization, and if I transition away from my PEO I’ll have to go back to the starter rating of 1.00 or more.
Fact: Although some PEOs may claim not to do this, most states require PEOs to maintain individual loss history. Since you'll be responsible for providing workers' compensation insurance if you take your HR processes in-house, your organization should be able to take your claims history with it and prevent the organization from having to start over again under your own FEIN. Make sure to check in with your legal counsel and financial experts to decide whether carrying over your rating or resetting is the best course of action for your company and get an understanding of the state rating standards that apply to you. If you're unsure if your state requires a PEO to maintain individual loss history, you can also contact your state’s workers' compensation bureau or check with NAPEO.org.
Myth: If I leave my PEO outside of the enrollment period for health insurance, my employees will be impacted and their deductible will reset.
Fact: Federal regulations require that most major insurance carriers to roll the deductions paid YTD to the new carrier. For most this will ensure any amount paid YTD is still recognized after the switch. The only time this may not be the case is if your company is insured through a smaller, local insurance company. If this is the case, then you may need to contact them to see the terms regarding moving from a PEO service to handling it in-house.
Additionally, many of the carriers you may have for ancillary benefits may be willing to quote you to stay with them after separation, so don’t assume you have to find a new carrier. There are times when PEOs have exclusive agreements with certain carriers, but there is always value in exploring this first, as they already have your claims history for things such as long- and short-term disability, life insurance, and other key areas.
Conclusion: Don't let mythical roadblocks hold you back from success
When deciding to move away from a PEO, the most important focus should be on how alternative options, such as a comprehensive in-house HR technology solution, will bring further growth, improve processes, save time and money, and benefit your business as a whole.
