When and How To Leave a PEO: Your PEO Exit Checklist

Explore OutSail's guide on exiting a PEO, focusing on HRIS selection, benefits setup, and tax registration, ideal for businesses outgrowing PEO models

Brett Ungashick
OutSail HRIS Advisor
July 4, 2023
user comparing checklist of PEO exit needs

The PEO model is becoming increasingly popular because the outsourced HR model can reduce a number of headaches for businesses. A PEO will assume employment liability from companies, ensuring that their employees are compliant, paid properly and taxes are filed accordingly.

The pandemic, and the remote work model which has accompanied it, has led to companies valuing PEOs even more due to their willingness to take on all of a companies state registration and tax filing requirements.

However, the PEO model is not for everyone. Below you will learn in what scenarios it makes sense to leave a PEO and what steps will be required when leaving a PEO

If you're curious about the effectiveness of your current PEO relationship, OutSail offers a PEO Audit service - at no cost

Reasons to Leave a PEO

Headcount Growth

The primary reason that companies will leave a PEO is due to headcount growth. A PEO is typically designed for companies with 5-50 employees. Many companies get into a PEO so they can offer better benefit plans or benefit rates, but once a company starts to grow beyond 50 or 75 employees, they can typically get similar benefit offerings on the open market, without all of the additional PEO admin fees.

Defining Your Employee Experience

Another reason that companies will leave a PEO is because a PEO can limit their ability to define their employee experience. Because a PEO is taking on the liability of thousands of employees from hundreds of companies, they end up creating very homogenous processes. The onboarding experience, employee handbooks and leave policies are typically dictated by the PEO and don't leave much room for a business to define their employee experience. Leaving a PEO will allow businesses to define their policies and their employee experience.

Growing HR Team

A final reason to leave a PEO is if your HR team has grown. A PEO often acts as an outsourced HR team managing payroll, compliance and benefits enrollment. When a company's HR team grows, they can bring those activities in-house.

High Costs

PEO's charge very high administrative fees, often in the range of $100-200 PEPM (per employee per month). When companies have less than 50 employees, these fees can be offset by the employee benefit cost savings, but once a company reaches a significant size, the cost-benefit of a PEO no longer adds up.

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Now that we know the reasons why a business might leave a PEO, it's time to think about the steps required to actually exit a PEO. Below are the four major considerations you'll want to focus on, and the order in which they should be solved:

1.) HRIS / Payroll Considerations

Build HRIS Requirements

The first step in leaving a PEO is to select a new HRIS and Payroll provider. The reason this step is first is because (1) it can be the most time-consuming part of the process and (2) the right provider will assist with some of the later considerations.

To start your HRIS research, you'll first want to determine what your system requirements are.

Focus first and foremost on what modules do we need: Payroll, Benefits Admin, Timekeeping, Employee Files, Onboarding, ATS, LMS, Performance, Engagement, etc.

After you've determined the scope, then start to think about what you want out of a future partner: Integrations, Value, Support, Ease of Use, etc.

Identify Shortlist Vendors

Once you've built your requirements, then it's time to figure out which vendors you should bring in to evaluate.

There are free services, like OutSail, that will recommend the right HRIS vendors to you based on your size, industry, scope and buying priorities - which can be a huge time saver.

Select Vendor & Begin Implementation

Once you've selected your vendor finalists, then it's time to bring them in and evaluate them against the key criteria that you set out in the previous step.

A typical vendor evaluation will involve 3-4 meetings per vendor: a discovery call, a high-level demonstration, a deep-dive demonstration and an executive presentation.

Once you have a favorite provider, don't forget to negotiate your agreement. This is another reason to use a free service like OutSail, as they can routinely help customers get 10-15% off list price

Once you've signed on with a partner, you will begin implementation. Implementations typically take about 3 months for mid-market companies. That timeline can be shorter for smaller companies and longer for enterprises.

2.) Benefits & Insurance Considerations

Interview & Select Benefits Broker

Once you have an HRIS vendor selected, the next step in your PEO exit is to identify a new benefits broker that will take over in lieu of the PEO.

The same process that was used to select an HRIS vendor should be used to select a benefits broker: Start internally by defining your goals & needs first, then identify a shortlist of candidates and evaluate those potential partners effectively.

Set-Up Employee Benefit Plans & Workers Comp

Once your broker is selected, you'll work with their team to set-up your new employee benefit plans. The primary focus will be determining the plans and carriers for your medical, dental and vision coverage.

Once those plans are determined, you'll want to have your broker work with your new HRIS vendor to load those plans into the system and to build carrier feeds.

It's also important with Workers Comp to ensure that there are no lapses in coverage. Make sure you work with your new broker and the PEO to figure out the right timelines to switch over.

Identify Ancillary Providers (HSA, FSA, 401k, COBRA admin)

In addition to your Workers Comp and medical, dental and vision coverage, you'll also want to ensure that your ancillary lines are covered too.

You'll want to see if your new broker (or your new HRIS vendor) can manage your COBRA administration, a 401k or HSA, FSA accounts.

A few things to keep in mind with COBRA:

  • COBRA participants will have to go through open enrollment as well with active employees.
  • If participants are left on the PEO’s medical polices a monthly fee could be charged (and it's not cheap)

A note about HSA/FSA:

  • If employees are receiving pre-tax benefits in your PEO, such as HSA, FSA and Commuter benefits, then you will need to find a new vendor for these services. Ask your broker if they or a partner can manage this for you.

A few notes about 401k too:

  • You will also need to select a new 401K provider (if offered)
  • You will need to roll over the plan’s assets to your new provider
  • It’s in your best interest to partner with a provider that can support compliance testing and 5500 filings.

3.) Tax & State Registration Considerations

Register with State & Local Authorities

Once you've selected your HRIS provider and your benefits broker, it's time to ensure your state registrations and tax accounts are in order.

The two primary steps that need to be completed here are: (1) Re-establishing SUTA IDs and (2) Re-establishing local withholding accounts

There are a number of ways to accomplish these tasks:

  • Many HRIS vendors can provide step-by-step guidance on how to register with each state, but cannot do so on your behalf
  • Your in-house HR team or an implementation consultant should be able to manage these registrations on your behalf
  • For a fee, some companies work with Middesk which provides a service that does these registrations on their behalf
Monitor FICA & FUTA Tax Restarts

In addition to registering with state and local tax authorities, you will want to also monitor your FICA & FUTA tax restarts.

Leaving a PEO mid-year can lead to businesses having to 'double pay' into their tax accounts. However, if you are leaving a Certified PEO, then this challenge may not apply.

It's worth searching "FICA & FUTA tax restarts" and reading articles that can provide more guidance here

4.) Compliance Considerations

Build Compliant LOA & PTO Policies

Now that you're getting close to exiting your PEO, one of the final steps is to start building out your company's policies around leave and time-off.

This build out will happen during implementation and most HRIS vendors partner with Mineral, an HR consulting firm that will provide guidance when creating these policies. Ask your HRIS finalists if they partner with Mineral or someone similar to provide compliance guidance during implementation.

Additionally, if you hire an implementation consultant, they should be able to handle the policy creation for you during implementation too.

Finally, some companies also choose to engage with an employment lawyer when creating these policies.

Create Employee Handbooks for Each State

Another compliance-related step that you'll need to take is building compliant employee handbooks in each of the states that you operate in. Your newly re-hired employees will need to acknowledge their employee handbook when they are re-hired.

There are a number of ways to build compliant employee handbooks. In addition to the three options mentioned above (Mineral, Implementation Consultants, Employment Lawyers), SHRM members can get access to a Handbook Builder that has all of the up-to-date state guidelines

Re-Hire Employees

Now that you've created compliant leave and time off policies, built your benefit plans into your HRIS and finished implementation, it is time to re-hire your employees.

During the re-hire process you will need to:

  • Obtain new I-9 forms for all current employees (leaving a PEO you are re-hiring your employees)
  • Create a new Offer Letter template
  • Establish processes and workflows for new hires including documentation
  • Have employees complete sexual harassments training

Your HRIS vendors and/or implementation consultants should be able to assist with each of those outlined steps.

1. Why should a company consider leaving a PEO?

Companies may consider leaving a PEO due to factors such as headcount growth, the need to define their own employee experience, expansion of the HR team, and high administrative costs associated with the PEO model.

2. What are the key steps involved in exiting a PEO?

The key steps include:

Assessing HRIS and payroll needs and selecting a new provider.

Identifying a new benefits broker and setting up employee benefit plans.

Registering with state and local tax authorities and monitoring tax restarts.

Developing compliant leave and time-off policies, creating employee handbooks, and re-hiring employees.

3. How can a company ensure compliance during the transition process?

Compliance can be ensured by working closely with legal and regulatory experts, such as HR consultants and employment lawyers, to develop policies and handbooks aligned with state and federal regulations.

4. What challenges might arise when leaving a PEO?

Challenges may include ensuring seamless transition of employee benefits, maintaining compliance with tax and state registration requirements, and effectively re-hiring employees while adhering to legal guidelines.

5. How long does the process of exiting a PEO typically take?

The duration of the process can vary depending on factors such as the complexity of HRIS implementation, the scope of benefit plan setup, and the extent of compliance requirements. However, it often takes several months to complete the transition successfully.

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Meet the Author

Brett Ungashick
OutSail HRIS Advisor
Brett Ungashick, the friendly face behind OutSail, started his career at LinkedIn, selling HR software. This experience sparked an idea, leading him to create OutSail in 2018. Based in Denver, OutSail simplifies the HR software selection process, and Brett's hands-on approach has already helped over 1,000 companies, including SalesLoft, Hudl and DoorDash. He's a go-to guy for all things HR Tech, supporting companies in every industry and across 20+ countries. When he's not demystifying HR tech, you'll find Brett enjoying a round of golf or skiing down Colorado's slopes, always happy to chat about work or play.

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