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A Comprehensive Guide to PEOs & AEOs

March 14th, 2023 | 5 min. read

By Shelby Betts

If you’re reading this article, you are likely curious if a professional employer organization (PEO) is a good option for your business. In addition to PEOs, you might also be wondering what other options you have, such as Administrative Service Offerings (ASO) or more self-service options like payroll and HR. I've got good news. Here, we'll break down the primary advantages and disadvantages of PEOs and your ASO options and help you understand how much each option costs.  

Now to start, I need to tell you that I love flying Delta. My best friend, however, is an adamant Southwest flyer. She loves the first come, first seated options for boarding, super cheap flights, and only paying for luggage that you need. I love Delta for the exact opposite reasons. When I fly with them, everything is included in my ticket price. I know I can get a great seat, eat Biscoff cookies with hot coffee, get offered free headphones, play their games, or even tap into the free Wi-Fi on my flight. I like Delta for largely the same reasons I enjoy all-inclusive resorts. Apart from the bottomless mojitos, I adore paying one fee for my airfare, shuttle, meals, lodging, and entertainment. It’s convenient.  

A Professional Employee Organization is an all-inclusive service

A professional employee organization (PEO) is like an all-inclusive service for everything you require to hire, pay, and retain employees. When you join, you actually enter a co-employment relationship with your PEO, which means your employees are actually considered employees of the PEO—NOT your employees. Although this might seem scary, this enables the PEO to negotiate effective insurance rates for their co-employers because they are going to the insurance carriers with thousands of employees instead of 30-50 employees. Many small businesses struggle to offer good, cost-effective health benefits to their employees, so a PEO can be a wonderful option if you want to offer health benefits for your employees but can’t afford to pay the astronomical prices that often exist in the SMB market.  

The first advantage to a PEO is the ability to get health and workers' compensation coverage for your business. Another advantage to a PEO is that the PEO assumes legal responsibility for most HR compliance like federal and state department of labor audits, sexual harassment, discriminatory policies, POP doc compliance, and Section 125 reporting that every employer should follow. The added HR support that comes from a PEO is one of the things many small business owners appreciate.  

Next with a PEO, you will be offered all the tools you need to hire and fire employees starting with onboarding, payroll, time and attendance, benefits administration, and other human capital management tools. This suite of technology enables you to maintain some responsibility for hiring and training employees, but removes the hassle of filing taxes or communicating with insurance brokers when employees make changes.  

To summarize, there are three core components of a PEO: insurance options for employees, HR technology, and HR compliance for your business. Some PEOs will offer other services like retirement services and 401k options for employees as well. Let’s take a look at some questions that can help you determine if a PEO is right for your business. 

How much does a PEO cost?  

PEO costs can vary in price, but a good rule of thumb is to plan for all of this to cost between 1-2% of your overall annual payroll. This means if you have a $1 million dollar payroll each year, you would expect to pay $10,000-$20,000 annually for insurance, payroll, and HR.  

Who is a good fit for a PEO?  

Any employer who likes the idea of completely outsourcing every detail of having employees will likely love a PEO. Many small businesses with 10-65 employees in high-risk industries like construction, manufacturing, and logistics might also find PEOs helpful. Government contractors who rely on safety ratings and SUI rates to obtain new jobs should also consider PEOs since you would be pooling the safety risks in your small company with a huge conglomerate of other companies in less risky segments.  

Who is not a good fit for a PEO?  

If you enjoy picking and choosing your employee health options and like to evaluate your vendors on a semi-frequent basis, a PEO is a bad fit for you. By joining a PEO, you lose control of selecting and customizing a plan that is tailored to the specific needs of your employees. In addition to that, your employees would be interacting with an entirely different company when it comes to HR, onboarding, or health questions. Many employers do not like giving up that kind of control with their teams.  

In addition to that, if your group is moderately healthy and you’re not in a high-risk type industry, a PEO might be a bad fit because you’ll likely be paying higher insurance premiums on your insurance than you would otherwise. This is because as a part of a PEO, you are sharing your ratios and safety discounts with much less healthy and safe companies that are also a part of the PEO. Industries like hospitality, white-collar service providers, non-profits, and medical practitioners may not find PEOS to be effective vehicles for their employees.  

Pros and Cons of PEOs 

The greatest pro to PEOs is their all-inclusivity. If you want to offer benefits, need a payroll service, and help with HR, but do not want to have any internal resources in your company dedicated to handling these items, you should look into PEOs.  

One of the cons to a PEO is that you lock yourself into an annual commitment and lose flexibility over your insurance prices. If your insurance e premiums change drastically over a period, it’s very difficult to exit a PEO or negotiate the rates you pay once you’ve joined. So vet your options carefully!  

So what is an Administrative Service Offering (ASO)?  

An ASO, often referred to as an administrative employer organization (AEO)s, operates almost exactly like a PEO, except you do not lease your employees from the PEO and there is no co-employment relation with the AEO. In a typical AEO Model, you will still work with them to customize an insurance package and retirement package for your employees. You will still have all the HR support and payroll resources you need. In fact, in most AEOs, your employees can even call and discuss their insurance questions with an expert at your AEO.  

Unlike a PEO, however, you have the flexibility to proactively manage your insurance costs and can heavily influence your rates by your safety ratings, the healthiness of your group, and your desire to educate and improve the lives of your employees. If you enjoy being in control and picking the right options that are very tailored to the unique needs of your organization while also offloading many of the HR duties to a team of experts, then an AEO is right for you.  

What is the cost of an AEO?  

Most AEOs are going to cost between $20-75 per employee per month (referred to as a PEPM rate) + insurance premiums. A good rule of thumb is to be prepared to pay 10% of an employee's salary for their health plans if you want to sponsor and pay for a portion of their benefits.  

The Pros and Cons of an AEO  

One of the greatest advantages of an AEO is that you’re not locked into an annual contract. You can shop for the right insurance rates and streamline your payroll and HR processes without the headache of a long-term commitment.  

As a con of AEOs, you will still be responsible for onboarding your new hires and processing payroll on a weekly or biweekly basis. You may also need to connect with your AEO brokers from time to time when you need to file or make claims. Additionally, you will still have some HR tasks to do for your organization with an AEO, so if you have no desire to handle HR tasks of any kind, an AEO is a bad option for you.  

How to get started with a PEO or AEO

By now, you’ve probably been able to determine if a PEO or an AEO is the right option for your business. As you start researching which company you want to use, you will likely be asked for a few items In order to get pricing for both options. You will need:  

  • Copies of your current health insurance plans (if you have one in place)  
  • Copy of your current worker’s compensation instance policy  
  • Copy of your Retirement plan options  
  • Employee Census Report (excel sheet that includes name, gender, and zip code of all employees plus their spouses and dependents)  

There are a lot of choices to make as a small business owner. At Whirks, we strive to give you a library of resources to help guide you to the best decision for your unique business. If you’re interested in learning more about PEOs, check out this article. If you think an AEO might be a better fit for your business, check out prices here or schedule a quick insurance checkup with our team. Together, let’s find you a solution that Whirks.