A question that many brokers encounter is whether a Professional Employer Organization (PEO) or Administrative Services Organization (ASO) arrangement is something your clients might consider.
Of course, that triggers other questions, which we address below.
What is a PEO?/What Makes a PEO Attractive to Employers?
As you might guess by its name, a Professional Employer Organization takes on many of your clients’ responsibilities as it relates to employees and HR. Your clients essentially become a co-employer for their workers. The PEO becomes the employer of record, and then leases the employees back to your clients. The PEO takes on the responsibility of employee onboarding, benefits management, payroll, workers’ compensation policies, and claims processing. Your clients maintain responsibility for hiring, day to day decision-making, and the daily operation of their businesses.
Here’s a look at PEO pros and cons:
Pros
- PEO manages HR functions
- PEO manages benefits, payroll, and other HR-activity vendors
- PEO sponsors employee benefits program and workers’ compensation
- PEO generally assumes most responsibility for tax filing and risk management
- Potential savings through outsourcing (reduced benefits costs; lower taxes)
Cons
- Less flexibility in selecting benefits providers and other vendors (selections are made by PEO)
- Potential for changes in coverage and rules [PEO makes selections and could be subject to different guidelines and mandates because of a larger employee population, including Affordable Care Act and state or federal rules such as the Family and Medical Leave Act (FMLA)]
- Complicated reporting for Applicable Large Employers (ALEs) who lease employees through a PEO as it relates to required Affordable Care Act (ACA) reporting
- Diminished role in the lives of employees (with HR functions managed by PEO)
A few of the major PEO vendors getting a lot of attention are ADP, Gusto, OnPay, Paychex, and TriNet, among others. They are included in a 2023 article published by Forbes Advisor. Others you might consider are BBSI and Rippling.
An alternative to a PEO is an Administrative Services Organization (ASO) arrangement.
What is an ASO?/What Makes an ASO Attractive to Employers?
While you may think of ASOs in the self-funded space, ASOs are available separately for human resources-related services. In these situations, an ASO acts as an employer’s service provider, performing many functions related to HR, including:
- Payroll processing services
- Tax prep and filing
- HR-related compliance assistance like HR policies, employee handbooks, etc.
- Benefits administration (health, dental, disability insurance, etc., claims processing, stop loss administration, COBRA, HRA, HSA, FSA, and premium reconciliation and payment)
ASO arrangements have been popular for larger groups; however, today, ASO services are also available to smaller firms. In fact, a small firm might choose an ASO because it does not want to take on the legal and other responsibilities related to benefits- and insurance-related tasks.
There are stand-alone ASO firms like HRWorks, Trüpp, and Tesseon, among others, and there are many insurance carriers that offer ASO services, too. (The Society of Human Resource Management (SHRM) offers a list and comparison online of 29 ASO firms.)
Some brokers prefer ASOs over PEOs and they cite the advantage of only paying for the specific services their clients need. Another advantage for ASOs is that the client retains full control over HR processes. That contrasts with PEO, where as mentioned, the PEO becomes the employer of record.
A variation on an ASO for HR is an HRO, or Human Resources Outsourcing firm. That’s where your client’s TPA administers only HR-related activities. These can include:
- Payroll processing and payroll tax administration
- HR policy development and oversight
- Job description development and maintenance
- Workplace safety and compliance
- Employee recruitment and new hire onboarding
- Employee training and development
- Employee benefits administration
- Managing employee relations
As you consider options for your clients, be sure to look at each individually. There is no one right answer for all of your clients. Two online articles you might consider are ASO vs. PEO: What’s the difference?, published by GenesisHR Solutions, and Investopedia’s Administrative Services Only (ASO)L Definition, Pros, and Cons from 2023.
