‹ Back

We get this question all the time here at the PEO Distillery and there are two very rational answers.

Before we dive into those answers, here are our 4 big things to consider in a transition, when shopping for a PEO:

1. The administrative burden on your employees

A mid-year switch will have some implications for your employees.  They will have to file two W-2s, may need to explain to their visa sponsor what a PEO is and how they’re not changing employers, they may need to re-enroll in benefits and fill out new direct deposit info.  They may need to redo their i-9s.  They may need to learn new systems and processes for tracking time and getting paid.

 

At the end of the day, a switch to a PEO should be a very positive story for boots on the ground, but it is worth getting out in front of the potential administrative burden especially for employees that have shown a propensity to struggle with admin in the past OR have special considerations such as an H-1b visa.

2. The administrative burden on your staff

Quoting PEOs has historically been an incredibly labor-intensive process for HR/Leadership.  PEO Distillery makes that process easier, but when it comes to gathering data, sitting on demos, and eventually implementing/operating a new system...  We can only get you so far!  Budget 20 hours of work per 50 employees you’re onboarding to a PEO in admin.  The dividends this time spent will pay you back post implementation are well worth the investment provided you choose the right vendor!

3. Tax implications

While this isn’t tax advice (you should talk to your CPA for that prior to a switch), historically, many PEOs require you to restart FICA, FUTA, SUTA as legally speaking the employees of the organization are entering a new employment agreement (one of Co-employment).  Advances have been made from a tax perspective on mid-year switches from non-PEO to PEO environments, and many PEOs will honor the taxes already paid to various states and federal entities.  It is extremely important to have a partner like PEO Distillery that understands the tax implications of a mid-year switch as this can often result in thousands of dollars in unexpected spend.

4. Benefits considerations

Medical benefits, 401K, FSAs/HSAs, are all affected by switching to a PEO or switching PEO providers.  This is far from an exhaustive list, but we’ll highlight some of the biggest considerations with each below:

Medical benefits – While most carriers will honor deductibles met for your employees when enrolling in new plans, the Out-of-Pocket maxes will reset in a mid-year switch.  This means that if your CEO had a baby, in the same year she hucked that cliff at Vail breaking her leg, and she caught covid in the ICU… well… she may want to know that she’s now on the hook for a whole new Out of Pocket Max for the calendar year!

 

401K switches mid year mean watching the compliance across two providers, filing 5500s on an old vendor you don’t work with anymore, rolling over a 401K (budget a quarter to get the funds moved over though you can usually start contributing to the new plan much faster than that).

FSAs sponsored by your previous PEO or run by your broker will go away and any funds left in the account will be forfeit.  It’s important to tell employees they should spend their FSA dollars ASAP if a transition to a PEO is imminent.

HSA Contributions will need to be set up to stay compliant over 2 vendors who don’t necessarily know the employees prior contributions.  The IRS however, will know!  So to avoid any unexpected tax liability prepare employees enrolled in an HSA for the transition.

 

With some of these pitfalls highlighted we’ll finally answer the question you clicked on the article to read about.

 

The two best times to kick off a search for a PEO are:

 

100 days prior to your benefits renewal.

Why 100 days you ask? The answer might surprise you and it has more to do with the PEOs than your company.  PEOs are required to collect a benefits renewal if you are within 60 days of that renewal.  The carriers base their pricing on several risk factors and that renewal can contain information that better allows them to price to risk.  To avoid getting your PEO quotes pinned to new higher rates, you should shop and start your PEO relationship before that 60 day window so they base their pricing on your old benefits rates.

90 days before the end of the year.

October is known as “Selling Season” in the PEO space because companies are often looking for a 1/1 start date on a PEO to avoid most of the implications we outlined above.  Administratively it’s the easiest time to switch, of that there is no doubt.  A word of caution however… PEOs do around 40% of their business in Q1.  This means Implementation crews are stressed, service isn’t what it will be the rest of the year, and many folks are home for the holidays that might normally help in this process.  This is why we here at the PEO Distillery recommend starting early, having contracts signed by Thanksgiving, and having employees onboarded and enrolled as soon as possible in December even thought they won’t go live until January 1.