Exiting a PEO: Reasons, Considerations, and Checklist

If you work with a professional employer organization (PEO), it’s a good idea to regularly reevaluate the relationship. Growing businesses can reach a point where the costs of working with a PEO outweigh the benefits, and some companies expanding into new states may also run into limitations on what PEOs can do there—eliminating the PEO’s original value proposition.

If you’re dissatisfied with your PEO or your business circumstances have changed, it may be time to leave.

Why leave a PEO? 3 common reasons

All PEOs are different—and so are all businesses. Evaluate your PEO relationship based on your specific business needs and PEO services, keeping these three common reasons for exiting a PEO in mind.

1. The PEO is too expensive

PEOs can be expensive. Depending on the size of your business and your specific needs, outsourcing to a PEO might cost more than handling responsibilities internally. Most PEOs set rates based on total payroll or number of employees, so costs can also increase as your company grows. At a certain point, you might find that exiting your PEO is better for your bottom line—even if the relationship was initially cost-effective.

Some growing companies also find that their PEO duplicates services offered by internal accounting or HR teams.

2. You aren’t satisfied with your PEO’s employee benefit plans

PEOs claim to offer premium benefits plans for affordable rates, but there’s no guarantee that your PEO’s benefits will be better than those you could secure on the open market. Exiting a PEO can give you the flexibility to choose employee benefits providers that meet your needs.

3. You want more control over your business

PEOs hold payroll and human resources information for their client companies. They’ll also follow their own human resources processes and policies—not yours. Exiting a PEO brings all of your critical business information in-house and can also give you more control over human resources activities.

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6 Considerations before exiting a PEO

Exiting a PEO can support your bottom line and give you more control over your business—but it also requires significant up-front planning and an investment of time to execute. Here are six things to consider before leaving your PEO.

1. Who will handle PEO responsibilities?

PEOs can handle administrative, human resources, and accounting tasks. Decide how you will reallocate these responsibilities internally, evaluating whether you will need to seek additional support or add to your accounting or HR teams.

2. What software will your company need?

You will likely need to license software to replace your PEO’s payroll, accounting, and human resources platforms. Consider the platforms your PEO uses and identify appropriate substitutes.

3. Will you need to open payroll accounts and/or register your business in other states?

Working with a PEO allows your business to quickly and easily hire out-of-state employees. If you employ workers in multiple states, exiting a PEO may require you to register your business in every state where you conduct business, a process known as foreign qualification. Determine where you’ll register your business and make a plan for handling foreign qualification(s).

Regardless of your decision to foreign qualify or not, you will need to open payroll accounts in every state where you have employees. These are accounts for payment of unemployment insurance, withholding tax, paid family and medical leave, and workers’ compensation (in monopolistic states).

4. When can you leave your PEO?

If possible, it’s usually best to leave your PEO at the start of the calendar year—but many PEO contracts stipulate how and when client companies can terminate the PEO relationship. Some PEOs require significant advanced notice, impose fees, or extend annual contracts from time of signing. Read your contract to determine when you can leave your PEO.

5. How will leaving your PEO affect employee benefit plans?

If you leave your PEO, your employees will lose access to their current benefit plans. Here are a few things to keep in mind.

Quality and cost of new plans. You’ll need to offer new benefits plans to your employees. Consider whether you’ll be able to provide competitive plans and how costs to your business will change.
Out-of-pocket maximum and deductible resets. If you leave a PEO mid-year, employees may have to restart any progress towards out-of-pocket maximums and deductibles. You may be able to avoid this by negotiating a deductible credit with your new provider. If not, consider plan options that minimize financial consequences for employees who have incurred significant healthcare expenses in the current calendar year.
Flexible Spending Accounts (FSAs). If your PEO offers FSAs, find out how termination will affect those accounts. In some cases, employees won’t be able to access FSA funds after the contract terminates.
The Consolidated Omnibus Budget Reconciliation Act (COBRA). Most PEOs require exiting companies to offer COBRA coverage under their new plans, which gives employees the option to continue the benefits they had under the PEO. Many charge a monthly fee for COBRA participants. Offering an attractive employee benefits plan can minimize these expenses by offering coverage that is equal to or better than COBRA coverage.

6. How will leaving your PEO affect employee taxes?

Federal Insurance Contributions Act (FICA) taxes, Social Security tax, and State Unemployment Tax (SUTA) are all subject to a taxable wage base limit, a cap on the total amount of taxable wages per employee for a calendar year. Once an employee meets the limit, their earnings are no longer subject to these taxes.

This base starts over every time an employee gets a new employer—and when you leave your PEO, your employees will technically have a new employer. If you plan to leave your PEO mid-year, evaluate how a wage base restart will affect your employees and communicate with them about the change, making sure to inform them that they can reconcile any excess taxes when they file their annual returns.

preparing to exit a peo checklist

Preparing to leave a PEO: 5 things to do

Careful preparation can support a smooth transition. If you’ve decided to leave your PEO, do these five things before you take the leap.

1. Gather employee information

Gather all employee information previously held by your PEO, making sure to request the following items:

Tax information
Employee tax forms
Payroll documents
Employee contracts and compensation information
Employee identifying and contact information
Performance evaluation and termination records
FSA balances (if applicable)
PTO balances and leave history

2. Identify services to replace

Evaluate your PEO services, identify which you will need to replace, and make a plan to replace them. Consider the following common PEO services:

Payroll administration
Employee benefits administration
Tax withholding
Compliance training (e.g. sexual harassment training)
Human resources support

You might decide to handle all of these responsibilities internally, hire a consultant or fractional services provider, or augment your capabilities with Mosey’s compliance platform.

3. Research benefits and insurance providers

Although you might be able to handle human resources and accounting activities internally, you’ll need to identify external insurance carriers and employee benefits providers. Research and vet potential partners, considering the following needs:

Health benefits
Dental benefits
Vision benefits
Disability insurance
Workers’ compensation insurance
General liability insurance

4. Identify compliance gaps

Exiting a PEO can change your compliance requirements, as you will become the employer to all your employees. To maintain compliance (and avoid penalties) consider the following:

Foreign qualification requirements. Multi-state businesses may be required to register in any state where they conduct business, a process known as foreign qualification. Consult state-specific guidelines to determine if and where you need to qualify.
State registration requirements. If you have employees in multiple states, you will need to open state payroll accounts. While you’re typically allowed a grace period of a few weeks while you open these accounts, failure to withhold and remit income tax for their employees or pay unemployment insurance can incur penalties and late filing fees.
Insurance requirements. Most US states require employers to carry workers’ compensation insurance. To avoid penalties, your business must maintain workers’ compensation insurance coverage with no gap between your PEO’s coverage and your own.
Benefits compliance requirements. In most cases, companies with 50 or more employees are required by the Affordable Care Act (ACA) to file annual information reports detailing providing healthcare coverage. You may also be required to distribute ERISA Wrap documents to your newly-hired employees.
Labor law compliance requirements. Every state has their own labor laws, covering everything from posting or sharing required notices with employees (e.g. labor law posters and time-of-hire documentation) to providing specific types of paid leave, such as paid family and medical leave. You’re required to comply with labor laws in every state where you have employees.

5. Prepare to handle responsibilities in-house

When you leave a PEO, all responsibilities previously handled by the PEO will return to you. It’s important to have a plan. Consult the list of services you’ll need to replace and decide how you’ll handle each. Consider allocating responsibilities across your existing workforce, adding to your team, or retaining a consultant or a fractional services provider.

Ready to exit? Here’s what to do

Once you’ve decided to leave your PEO and made a plan to handle PEO responsibilities in-house, you’re ready to leave your PEO. Here’s how.

1. Locate your tax ID number

In some states, PEOs can file certain taxes for you. When you leave, you’ll need to file under your own federal tax ID number, which is also known as an Employer Identification Number (EIN). Make sure that you have it accessible.

2. Communicate with employees

Exiting a PEO creates administrative work for your employees. At a minimum, they’ll need to complete new-hire paperwork and navigate new benefit plans. Make sure to provide ample notification of the change and communicate your reasoning, stressing positive outcomes for both employees and your business. Be sure to also inform employees of new benefit options and discuss any potential tax or benefit complications, particularly if you are leaving your PEO mid-year.

3. Send a termination letter to your PEO

Most PEOs require a written letter of termination to end a contract. Some benefits providers might also request to see this documentation, so it’s a good idea to send one even if your contract doesn’t require it.

4. Re-hire your employees

Hire your employees, making sure to collect federal tax withholding forms (W-4s), direct deposit information, benefit elections, and Employee Eligibility Verification forms (I-9s) from each member of your team. Once you’ve re-hired your staff, follow your internal onboarding process, such as circulating your company handbook.

Mosey’s all-in-one compliance platform can help you manage some of the tasks that a PEO handles. We automate setup, provide tools to identify and manage ongoing compliance, alert you when requirements change, and provide a unified source of truth. Our platform is agnostic to the payroll provider or tax vendors you use, making it a good fit for scaling startups operating in many locations at once or planning to move off of a PEO. Want to learn more? Schedule a demo—our team is excited to meet you.

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