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Once you are in a PEO there are substantial consequences involved in getting out. A PEO Exit Strategy Checklist is recommended, as well as working with a knowledgeable broker to provide guidance in the timing and proper replacement of benefits, payroll, and taxes.
There is hope for a smooth transition if you prepare early and work with knowledgeable insurance brokers, who can help you prepare a good implementation plan that will encompass workers’ compensation, payroll and human resources for assistance with creating an employee manual and transitioning the employees back to your own company. If you have health and welfare benefits there may be issues that require a specialist so you will want a broker with experience and leverage with
carriers. You may also consider a benefits administrator, or outsourcer, to free you to focus on
other things. You also best obtain a qualified pension advisor if you are re-establishing a 401(k)
PEO Exit Strategy Checklist:
Taxes. If you terminate mid-year the PEO will have to complete final taxes up to that date and
provide W2’s for that period. Your employees will be considered new hires when you take them
back. You will have to be sure you still have a Federal and State Tax ID number and you will be
responsible for W2s for the rest of that year. Therefore your employees will have two W2s from
two employers. You will most likely overpay FUTA and SUTA.
Workers’ Compensation. There can be no lapse in coverage so you’ll have to carefully time the
transition. Some comp carriers may consider you a start-up company since you may not have had
comp under your name. This could impact risk rating and even the ability to obtain coverage.
You will need to find a good agent to assist you.
Payroll. You will need to find a new payroll processor and time the transition so the new
processor can provide uninterrupted service. The new service will require lead time to get setup
and this should be coordinated with your benefits and comp agents to avoid coverage lapses or
Employee Handbook/Manual. You will need to issue or reissue an employee handbook. You
may have to coordinate some policy with that of the PEO, such as with leave (mentioned below)
in order to keep consistency.
Employee Benefits. You will need to find a good benefits broker and begin the process early
enough to choose the best package of benefits for your company. Some carriers may consider
you a start-up company because you have not had payroll and benefits under your name. This
could impact your risk rating and other underwriting considerations. We have had good results in
negotiating with carriers early on in the process to address this issue. If you have a waiting
period for new hires you will either have to get the carrier to waive it or you’ll have to pick up
COBRA from the PEO during that period.
If the PEO plan was fully or partially self-insured you may have issues with continuing to get
claims paid that were incurred prior to termination. You may be required to continue to pay
administration fees until all claims are cleared. If the PEO plan was fully insured and had a
deductible your employees may have to verify claims to get deductible credit. You may need to
obtain HIPAA-credible coverage certificates.
COBRA. In most cases, the PEO will be responsible to maintain COBRA for qualified
participants prior to your termination. This is a good thing because bringing COBRA participants
into a situation where the carrier might see you as a start-up could create problems.
410(k). Each employee may have to arrange transfer of their PEO 401(k) into an individual IRA
and if rules permit, later transfer it into your 401(k) once you have established one. Timing of
deferrals with transfer of payroll processors will be critical in a smooth transition.
Leave of Absence or Disabled. Be sure to carefully check the PEO’s policy regarding “leave”
before signing up or terminating. You need to know what their policies are toward vacation, sick
leave, disability, FMLA, and other forms of leave and how they might impact your departure. Be
sure to immediately establish your own policy communicated in a proper handbook. Our HR
Consultants suggest that you may be responsible for anyone on disability leave at the time of
your PEO termination – you may have agreed (in your PEO contract) to job restoration or other
leave guarantees or rights. If your company has less than 50 employees and is not subject to full
FMLA leave requirements, the PEO may have to retain that responsibility for anyone on FMLA
at the time of your termination.