Small business using a PEO can save money in many different ways, in large part because PEOs give you the chance to offer more benefits to your employees at a reduced rate. Because of the nature of the business, a PEO can get a better rate for benefits like workers’ compensation, medical benefits, retirement plans, etc. And through this, the PEO is able to save your business money.
But what is a PEO? And how does it actually work? What gives it the ability to actually save a small business money on benefits that much larger corporations are able to offer?
What Is A PEO?
The acronym PEO stands for Professional Employer Organization. PEOs work with small businesses to help them manage compliance, human resources, payroll, benefits, and so many of the other required functions necessary to running a business. PEOs handle all of this for you and so many other things so that you are able to focus on what matters most: growing your business.
PEOs can give small businesses a similar buying power that large corporations have. By grouping growth stage companies together, a PEO gives these companies similar affordable rates those large companies enjoy. This means access to quality healthcare and employee benefits and perks that might not be options otherwise. And because they are buying the benefits in bulk, they are able to get a much better rate per employee. Plus, having these healthcare and benefits options can be crucial for attracting and retaining top talent.
Get the full guide on how PEOs work for small businesses.
How Can PEOs Help Small Businesses Save Money?
The most obvious one is health insurance. According to a Forbes article, health insurance costs are going up. Further, because of a requirement by the Affordable Care Act, businesses with 50+ full time employees are mandated to provide health insurance starting in 2016. Between these two realities, health insurance is starting to get very expensive for companies.
If you went to a healthcare broker with five employees, your options for health insurance would be limited. While there would be options, the kind of insurance you’d want to get to compete with larger companies would be enormously expensive. According to a survey released by the United Benefit Advisors, the average health cost for an employer/employee is $6,800 across the United States. The smaller you are, the higher you are on that average.
Depending on the state that you are in, PEO health insurance savings savings can sometimes be as high as $2,400 per employee per year. With five employees, you’d be saving $12,000 a year in health insurance costs. What could you do with that additional money?
Another benefit that many companies hope to offer their employees is a 401(k). There’s no denying that saving money for the future is necessary. And even as the owner, having all your eggs in one basket (your business) is really risky. Too many businesses fail each year for you not to be diversified.
According to ShareBuilder, the first-year 401(k) cost is $2,551 for a 10-person company. Further, there are other fees that the 401(k) provider will charge you to ensure that they are making a sufficient profit on your small operation.
Small companies often have trouble connecting with quality 401(k) providers, however. Providers wants to work with much larger companies because they have more money to invest. According to ShareBuilder, if your company has a program that has grown to over $500K or $1M in total assets, you should expect to save at least 25% in fees.
A PEO can get you to this number much faster. Because the network has all the money working together, the 401(k) provider has to offer a discount on fees relative to the total amount of money invested. If your 5 young employees have a total of $250,000 saved, your fees will be greater per employee. If you are suddenly grouped together with 1,000 employees and you have $25 million saved, your per-employee fee will drop.
Workers' Compensation, Life Insurance, and Other Benefits
The reality is, a PEO has connections with any kind of insurance there is. If you want to offer life insurance to your employees, the PEO has those connections. If you need to get Workers’ Compensation insurance, the PEO can acquire it in bulk rather than you having to handle it yourself.
Justworks is a PEO. In the platform, you can choose what kind of insurance, 401(k) and more you want to offer your employees. These rates are negotiated because of the buying power Justworks has as an organization.
But it isn’t just the insurance and retirement benefits. There are some PEOs that have connections with travel agencies, allowing employees to get discounts on airfare, hotels, resorts, and other interesting perks that large corporations have.
And the reality is, PEOs have all the size you need. By grouping thousands of employees across hundreds of companies together, you’ll save money on every benefit you want to get your employees. Whether it’s health, dental, vision, life, retirement, works compensation, or even the extra perks, a PEO will save you money.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.