Posted on / Updated on / in Human Resources Consulting /

Moving Away From a PEO: Exit Strategy and Checklist

Once you are in a PEO contract, there are substantial considerations involved in getting out. You must have a checklist and some guidance in the timing and proper replacement of benefits, payroll, and taxes. There is hope for a smooth transition if you prepare early, develop a competent team of professionals, and prepare a good implementation plan.

First and foremost, the benefits of moving away from a PEO should clearly outweigh the current state of affairs – from a customer service, expertise, and overall cost perspective. Clients we have helped move away from a PEO have saved anywhere from $50,000-$150,000 in a given year! Read more about one of these in this case study. Your business may or may not have the same options for cost savings in making a transition – that’s why fully evaluating your options is most critical, before providing notice to exit.

Once you’ve decided that moving away from a PEO is right for your business, the following are issues we can help you incorporate in your PEO exit strategy:

Understanding Taxes When Moving Away From A PEO

If you terminate mid-year, the PEO will have to complete final taxes up to that date and provide W2’s for that period.

  • Your employees will be considered new hires when you take them back.
  • You will have to be sure you still have a Federal and State Tax ID number and you will be responsible for W2s for the rest of that year.
  • Therefore your employees will have two W2s from two employers.
  • You will most likely overpay FUTA and SUTA. Workers’ Compensation.
  • There can be no lapse in coverage so you’ll have to carefully time the transition.
  • Some workers’ comp carriers may consider you a start-up company since you may not have had workers’ comp under your name. This could impact risk rating and even the ability to obtain coverage. Your HR Consultant will recommend a good agent to assist you and the HR Consulting Team in making the best decisions for your business.

Planning for Uninterrupted Payroll Service with a New Payroll Processor

Your HR Consultant will recommend a new payroll processor and time the transition so the new processor can provide uninterrupted service.

  • The new service will require lead time to get set up and this should be coordinated with your benefits and comp agents to avoid coverage lapses or deduction problems.

Reissuing an Employee Handbook/Manual

You will need to issue or reissue an employee handbook.

  • Your HR Consultant may have to coordinate some policy with that of the PEO, such as with leave (mentioned below) in order to keep consistency.

Transitioning Employee Benefits and Potential Issues You May Encounter

Your HR Consultant will recommend a good benefits broker and begin the process early enough to choose the best package of benefits for your company.

  • Some carriers may consider you a start-up company because you have not had payroll and benefits under your name.
  • This could impact your risk rating and other underwriting considerations.
  • If you have a waiting period for new hires your HR Consultant or selected broker will negotiate with the carrier to waive it or you’ll have to pick up COBRA from the PEO during that period.
  • If the PEO plan was fully or partially self-insured you may have issues with continuing to have claims paid that were incurred prior to termination – be prepared for this.
  • You may be required to continue to pay administration fees until all claims are cleared.
  • If the PEO plan was fully insured and had a deductible your employees may have to verify claims to get deductible credit.

Determining Who Maintains COBRA

In most cases, the PEO will be responsible to maintain COBRA for qualified participants prior to your termination. This is a good thing because bringing COBRA participants into a situation where the carrier might see you as a start-up could create problems.

Timing 401(k) Transfers from PEO 401(k)

Each employee may have to arrange transfer of their PEO 401(k) into an individual IRA and if rules permit, later transfer it into your 401(k) once you have established one.

  • Timing of deferrals with transfer of payroll processors will be critical in a smooth transition.

Confirming Leave of Absence or Disability Policies

Be sure to carefully check the PEO’s policy regarding “leave” before signing up or terminating.

  • You or your HR Consultant helping migrate you away from the PEO will need to know what their policies are toward vacation, sick leave, disability, FMLA, and other forms of leave and how they might impact your departure.
  • Be sure to immediately establish your own policy communicated in a proper handbook.
  • Our HR Consultants suggest that you could be responsible for anyone on disability leave at the time of your PEO termination – you may have agreed (in your PEO contract) to job restoration or other leave guarantees or rights.
  • If your company has less than 50 employees and is not subject to full FMLA leave requirements, the PEO may have to retain that responsibility for anyone on FMLA at the time of your termination.

If you are considering moving away from a PEO contract and “unbundling” human resources, payroll, and employee benefits, contact us for a no-cost consultation. We have experience in “unbundling” and in most cases provide our clients with significant cost savings, improved support, and streamlined HR, benefits, and payroll services.

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