The Affordable Care Act legislation introduced the need for companies with over 50 employees to provide health insurance to all of their workforce to avoid tax fines. This, of course, means that medium to large companies are experiencing significant increases in overheads as health insurance premiums continue to rise year on year. As a result, the popularity of Professional Employer Organizations (PEOs) have soared in popularity as a method of reducing costs. They do this by hiring your employees and therefore become their official employers in the eyes of the law and the U.S. government.

The PEO can then benefit from economies of scale and get a much better rate on health insurance than other companies can individually.  As a consequence, this means that the organization where the employee completes their day to day work pays the PEO a monthly fee, but is still achieves a benefit by reducing their HR and employee health insurance costs. This is seen a necessity by some, to dilute costs to enable them to keep their same amount of employees as pre-Affordable Care Act times.

However, there’s risk involved with outsourcing payroll activities. If the PEO files for bankruptcy, then your employee’s will lose their health insurance and will feel all of the pain associated with bringing payroll activities in-house again. Using a PEO can also cause issues if they fail to correctly declare taxes. If the PEO incorrectly declares taxes on behalf of the client’s company, then the client bears full responsibility for any legal or financial ramifications that occur as a result of the PEO’s mistake. Obviously, this does not mean that all organizations should avoid using a PEO, as they offer significant benefits in overhead reduction. However, everyone should recognize that a poor PEO can cause more harm than good.

 For this reason, IRS introduced new guidelines in 2014 with thorough certification requirements to ensure that they can effectively deal with their potential client’s taxes. This ensures that the IRS can efficiently collect the taxes that they are owed. A Certified PEO (CPEO) also cannot have any member of senior staff or “responsible individual” who has in the past failed to pay the required Federal or State income taxes or sanctioned for unprofessional behavior in the eyes of the law.

 

This further reduces the risk for clients using CPEOs and the IRS when it comes to tax activities. A CPEO is also asked to provide information regarding their working capital and unaudited financial accounts to verify the organization’s financial health and protect businesses from outsourcing payroll to unstable PEOs.

The economy is still slowly recovering from a decade of uncertainty caused by the financial crisis in 2008, and schemes like the CPEO reduce the risk for businesses and allow them to manage costs more effectively to increase stability. With a Republican administration with Trump at the helm, we can be confident that we'll see further measures to support businesses in an attempt to further stimulate growth.