PEO insurance explained: A guide for employers

Juggling limited in-house resources and budgets can make it difficult for small to medium-sized businesses to navigate the employee healthcare landscape.

The stress of meeting financial goals and employee expectations has never been greater. As premiums continue to climb, 93% of small business owners worry about the sustainability of employee benefits. 

This article explores how innovative solutions, like PEO insurance and ICHRAs, can help companies overcome these challenges by offering flexible, affordable health coverage while simplifying the administrative burden.

What is PEO insurance?

PEO insurance is health insurance provided through a Professional Employer Organization (PEO). Unlike traditional insurance plans, PEO health insurance is part of a co-employment agreement where the PEO shares HR responsibilities with a business.

PEOs pool employees from multiple companies into one plan, allowing them to negotiate better rates and offer additional benefits. This structure helps smaller businesses provide robust insurance options that would otherwise be inaccessible due to high costs or limited resources.

According to NAPEO, businesses gain the following measurable benefits from working with PEOs:

• 50% less likely to go out of business

• 10-14% lower employee turnover

• 7-9% faster businesses growth

By simplifying company health benefits management, PEOs enable businesses to focus on growth while offering competitive employee perks.

Benefits of using a PEO for insurance

Using a PEO for insurance offers three primary benefits that can significantly enhance business operations and employee satisfaction:

• Cost savings through group buying power: PEOs pool employees from multiple companies, creating a large group that enables them to negotiate lower premiums and better insurance terms. This shared approach makes high-quality insurance more affordable, particularly for small businesses.

• Streamlined administration: PEOs manage time-consuming HR tasks like benefits enrollment, payroll, and compliance. This streamlined benefits administration reduces the workload for employers, allowing them to focus on growth and strategy instead of navigating complex processes.

• Access to better coverage options: Small businesses often struggle to secure robust insurance plans on their own. PEOs provide access to comprehensive coverage, including enhanced benefits like dental, vision, and retirement options, helping employers attract and retain top talent.

• Reduced overhead costs: By outsourcing HR tasks like benefits administration, small businesses can streamline internal processes and cut down on paperwork. This translates to significant savings in time, stress, and money, allowing businesses to focus on their core operations.

• Enhanced employee experiences: PEOs offer user-friendly tools, such as mobile apps and enrollment portals, that empower employees to easily manage their benefits. Dedicated support teams are also available to assist employees with enrollment and answer any questions, improving their overall experience.

• Diverse benefit options (beyond health, dental, vision, and retirement): PEOs provide access to a wide array of perks that can help attract and retain top talent in a competitive market. These benefits often include options like cyber liability coverage, mental wellness programs, and flexible spending and reimbursement accounts.

• Risk mitigation and compliance: Navigating complex healthcare regulations can be challenging, especially for businesses with employees in multiple states. PEOs stay up-to-date on federal and state laws, providing expert guidance to ensure your business remains compliant and mitigates potential risks, regardless of where your workforce operates.

By combining cost savings, streamlined administration, and improved coverage — PEOs provide businesses with a holistic solution to managing employee benefits effectively.

How does PEO insurance work?

PEO insurance operates through a co-employment model in which the PEO and the business share employment responsibilities. The PEO handles HR tasks, including benefits management, while the business tackles daily operations.

The main functions of a PEO include negotiating and managing insurance plans. By pooling employees from multiple companies, PEOs create a larger group, enabling them to secure better rates and coverage options than a single business could achieve alone.

PEOs typically offer a wide range of insurance options, including health, dental, vision, and workers' compensation coverage.  These plans often come with additional perks, such as access to wellness programs and retirement savings options, making them an attractive choice for businesses aiming to support and retain their workforce.

Once a plan is in place, the PEO manages enrollment, claims processing, compliance, and other tasks to ensure a seamless experience for employers and employees. Many PEOs provide a central tech platform that unifies all employee information, which can streamline workflows and make it easier for businesses to focus their attention on the work they do best. 

PEOs also offer user-friendly tools, such as mobile apps and enrollment portals, that allow employees to easily compare health plans, check provider networks, review prescription coverage, and add family members to their healthcare plans. 

Dedicated support teams ensure workers get the help they need during enrollment and beyond and help lift some administrative burden off your benefits administrator.

How to decide if a PEO is right for your business

Deciding if a PEO is right for your business involves evaluating factors like business size, industry, employee needs, and budget.

1. Consider your business size and industry

PEOs are ideal for businesses with 5-100 employees, especially those in industries with complex compliance needs, such as healthcare and construction.

These types of businesses benefit from the PEO's ability to manage insurance, payroll, and compliance without overburdening internal resources.

2. Assess your employee needs and budget

A PEO could be a strong fit if your workforce requires comprehensive benefits like retirement plans or wellness programs. Ensure your budget allows for the investment in co-employment.

This step helps determine if a PEO’s bundled services align with your business goals and provide value that justifies the investment.

3. Ask potential PEO providers qualifying questions

Key questions to ask about insurance plans and services to ensure providers meet your needs include:

• What types of insurance plans do you offer (health, dental, vision, workers' compensation, etc.)?

• How do you handle claims and enrollment?

• Can you customize plans based on our company’s needs and budget?

• How do you ensure compliance with state and federal regulations?

These questions help you understand how the PEO will manage your benefits and ensure compliance, giving you clarity on their services.

“PEOs are ideal for small businesses that face complexity in hiring and employee management,” says Derek Bettencourt, a health insurance broker with experience in PEOs, insurance companies, and online brokerages.

4. Consider alternative insurance coverage options

While PEOs are a popular choice for managing employee benefits, they may not suit every business. Smaller companies or those not ready for the co-employment model might find PEOs too complex or costly.

If a PEO isn’t the right fit, there are other insurance coverage options to consider.

Exploring flexible PEO insurance alternatives like ICHRAs

Businesses researching PEO insurance may also want to consider other cost-effective alternatives like HRAs, ICHRAs, and QSEHRAs.

HRAs (Health Reimbursement Arrangements) allow businesses to cover healthcare expenses, including premiums. ICHRAs (Individual Coverage Health Reimbursement Arrangements) and QSEHRAs (Qualified Small Employer Health Reimbursement Arrangements) are specific types of HRAs that offer tailored solutions based on business size and structure.

Additionally, PEOs can work with ICHRAs by handling administrative tasks like payroll and compliance while allowing businesses to reimburse employees for individual health plans.

These health insurance alternatives allow employees to choose their own health plans, giving employers a cost-effective way to offer benefits without the complexities of co-employment.

Traditionally, many businesses have relied on group insurance plans. However, this approach can be more expensive and less flexible for smaller businesses.

PEOs vs. employee benefits brokers

PEOs and employee benefits brokers both play essential roles in managing employee benefits, but they serve different functions.

A PEO acts as a co-employer, sharing responsibility for HR tasks, including benefits management, payroll, and compliance. In this model, the PEO manages the entire benefits package, negotiating plans and handling the administration on behalf of the business.

On the other hand, employee benefits brokers are advisors who help businesses find and select insurance plans that best suit their needs. Brokers don't become co-employers and don't manage HR tasks. Instead, they work with insurance carriers to present options, guiding businesses through the decision-making process.

The primary difference between the two lies in the level of involvement. PEOs take on more responsibility by co-employing the workforce and directly managing benefits, while brokers act as intermediaries, advising businesses on benefits choices without taking on operational responsibilities.

Average PEO insurance costs and savings

The cost of PEO health insurance typically follows two main pricing models: flat fees or per-employee rates.

Flat fees are charged on a monthly or annual basis and cover a range of services like benefits administration, payroll, and compliance management. This model provides predictability for businesses with stable employee numbers.

Per-employee rates, on the other hand, scale based on the number of employees covered, making it a more affordable option for smaller businesses.

Regardless of the cost structure, partnering with a PEO can result in significant savings compared to how much employers normally pay for health insurance.

The National Association of Professional Employer Organizations (NAPEO) reports that businesses see an average return on investment (ROI) of 27% when using PEO services.

With that ROI, businesses could save around $2,546 for every $2,000 spent on PEO services, resulting in a net gain of $546 for every $2,000 invested.

Keep in mind that the ROI reported by NAPEO is an average across all businesses using PEO services. Some businesses may experience a higher ROI, while others may see a lower return.

PEO insurance FAQ

What does PEO stand for?

PEO stands for Professional Employer Organization. A PEO is a company that partners with businesses to manage human resources tasks like payroll, benefits, compliance, and risk management, acting as a co-employer of the business’s workforce.

Is health insurance cheaper with a PEO?

Health insurance is often more affordable through a PEO due to the group buying power it provides. By pooling employees from multiple businesses, PEOs can negotiate better rates and offer more comprehensive plans than small businesses might be able to access independently.

What are the disadvantages of a PEO?

While PEOs offer many benefits, they can be costly for smaller businesses and may require giving up some control over HR functions. Additionally, the co-employment model can sometimes create challenges in managing the employer-employee relationship.

Are PEO insurance plans ACA-compliant?

PEO insurance plans are generally ACA-compliant as long as they meet the minimum essential coverage requirements outlined by the Affordable Care Act. PEOs typically ensure that health insurance plans offered to employees meet ACA standards.

Take the next step toward better benefits solutions

PEO insurance offers small businesses significant advantages, including cost savings, access to better coverage options, and streamlined administration.

By partnering with a PEO, businesses can provide competitive employee benefits while alleviating the burdens of HR management, payroll, and compliance. PEO services let companies tap into group buying power, offering employees high-quality insurance plans that they may not be able to access independently.

As you evaluate your business’s needs, consider whether a PEO is really the right solution and explore other flexible options like ICHRAs. Discover how ICHRAs enhance your benefits offering.

Contact Thatch today and take the next step toward a more efficient and cost-effective benefits solution.