Extracting the PEO Relationship

When an employer elects to leave the PEO relationship, they will notice changes in the way they process many items. Many of these changes will revolve around the firm becoming an employer of record once again.

In the Co-Employment relationship, the PEO is the “employer of record” and the “administrative employer”, even though the firm as the “worksite employer” continues to run its business on a daily basis (i.e. hiring, firing, operational decisions). The transition back to the employer of record again may also affect the employees from a tax & benefits perspective as well as the firm.

Part A: Below is some issues on the Employer level that may affect their transition to the BPO/ASO service. Clients should be aware of their potential impact.

Does the employer have a new worker’s compensation policy?

If yes, this could impact their safety manual, accident notification procedure, and poster information.

Does the employer have a new State Unemployment Tax rate?

Depending on the length of time a company was with a PEO, they might have an existing number that needs to be reactivated or they might need to apply for a new number. In certain states, the PEO might have already set up a number for the company and have been filing on their behalf. Similar to other clients, the employer will need to complete a Power of Attorney (POA) for each state that they would like Kona to be their addressee of record and handle their claims directly, these were previously being handled by their PEO and may not have had a direct effect on their SUI rate. With the change from the PEO, U/E claims would have the ability to directly affect their SUI rate on an annual basis.

Is the employer aware that a change from a PEO to an ASO at any time during the calendar year, except the first payroll process, will affect their taxes (SUI, FUTA, Social Security)?

Any employee that has surpassed the income limits will have their FICA reset to zero for the remaining payrolls. The Employee will be able to claim the difference at Year-End, the Employer will NOT

Did the employer have access to a PEO Masterplan insurance policy for their employee health benefits?

If they were part of a Masterplan insurance policy, their employees may receive COBRA information from the PEO directly. In addition to many of the variance of PEO carriers’ offerings, the company may discover that they are not able to meet the product criteria in the marketplace. Employees may be experiencing enrollment meetings, new deduction code setups, and a general disruption during the changeover.

Did the employer have access to a 401(k) plan through the PEO relationship?

If so, this might be a Multiple Employer Plan (MEP) and something they cannot continue to deposit funds into. If that is the case, the employer may experience a blackout period, plan termination fees, and other complications when rolling the plan over to a new vendor.

Did the employer keep their own personnel files?

If not, can they request copies of the files from the PEO prior to termination of services? If the employer receives a subpoena request, they should provide any information they have and have the PEO provide any additional information as the Employer of Record during the contracted time.

Did they fax in their new hire information, employee-related forms, including direct deposit for processing?

If yes, the employer needs to be aware that this may be something they must handle through a BPO/ASO web portal. Ongoing maintenance, entering any deductions (medical deductions, 401(k), etc.) address information, terminations, may now be part of their responsibility.

Did the PEO complete their I-9 Forms?

Depending on their previous PEO, they might not have completed their I-9 form, and this responsibility will fall directly on them. Some employers elect to retain the existing I-9 Forms and all the liability that goes with them, while other employers use this as a good opportunity to update all their forms.

Did the prior PEO provide a company-specific handbook, separate new hire policies, or a generic policy manual?

If so, this is something that needs to be handled at the beginning of the transition. The handbook revision will need to remove any reference to co-employment and the PEO and any laws that may no longer apply to the employer, i.e FMLA, COBRA.

The employer should be aware that since leaving the PEO relationship, they will generate an additional W-2 for their employees if this is a mid-year change.

In addition, any limits that have been met by the employer will restart.

Was the employer used to an on-site presence from the PEO HR representative during the employee life cycle?

If so, the employer may expect a certain level of service to continue, i.e. on-site termination meetings, harassment investigations, interviewing. It is important that the correct expectation level is set during the implementation phase – the guidance and assistance provided through BPO/ASO is to the employer.

If you need any help or have any questions regarding PEO relationships don’t hesitate to reach out to us. We are here to help!