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What is PEO Insurance?

PEO insurance

Key Takeaways

1. In some countries it is compulsory for employers to offer various forms of insurance for their employees. In other jurisdictions, businesses choose to offer insurances to employees as an additional benefit. 

2. Companies can often benefit from engaging a Professional Employer Organization (PEO) to administer benefits, including insurance, on their behalf. 

3. There are pros and cons to PEO insurance, and every company needs to consider whether it is better to engage a PEO or to insure workers directly. 

PEO insurance is insurance administered by a Professional Employer Organization (PEO). This often refers to employee health insurance, but could be any kind of insurance that benefits employees (such as unemployment insurance or life insurance).

Here we explain what PEO insurance is and the pros and cons of using a PEO for employee insurance.  

What Does PEO Insurance Mean? 

In many countries (such as the USA or Germany), employers have compulsory health insurance obligations. In PEO arrangements, the PEO often (but not always) becomes responsible for health insurance, rather than the company that the employee works for on a day-to-day basis. 

A Professional Employer Organization, or ‘PEO’, provides payroll and HR solutions for client companies ensuring compliant payroll, tax withholding and HR services for employees. Where the PEO operates internationally, they are known as a ‘Global PEO’ or ‘International PEO’.  

In some countries it is not compulsory for employers to provide health insurance, but it is nevertheless customarily expected by employees (in these cases they are known as non-mandatory benefits). In other cases, businesses decide to offer private health insurance as a purely optional extra to make working with that company more appealing. For example, in Australia (which has a publicly funded healthcare system), some employees can avoid paying a medicare levy surcharge (an extra income-related tax) if they have appropriate private health insurance. It is also common for private health insurance to be provided as an optional employee benefit in Canada

For more information on health insurance specifically check out The Expert Guide to Health Insurance for Remote Workers

Other types of insurance that a PEO may be required, or choose to provide include: 

  • Workers’ compensation. A form of insurance replacing employee wages in case of injury, in lieu of suing the employer for negligence. For more information see ‘What is Workers’ Compensation?‘; 
  • Disability insurance. This is a form of insurance that kicks in when a worker becomes disabled. Read more in ‘What Is Disability Insurance?‘; 
  • Life insurance. This pays out a lump sum to an employee’s family in case of death; 
  • Unemployment insuranceUnemployment insurance is often funded partly by employers and partly by employees and provides extra payment in the case of unemployment than would otherwise be applicable under social security or social welfare programs. 

Hire globally in 24 hours with Horizons PEO services.

Why Should a Business Choose PEO Insurance?

The core original purpose of a PEO, and their historical predecessor, a ‘labor leasing’ company, was to manage the pension and health insurance obligations of employers. 

Originally, employers may have simply seen the benefit of outsourcing the compliance obligation of offering health insurance: By arranging for a third party to provide the insurance, the client company could focus on its core business. 

However, in recent years it has been seen as an effective mechanism for acquiring better healthcare benefits for employees. In countries like the US, where employers are often obliged to provide health insurance, it can be difficult for smaller employers to afford ‘good deals’ for their employees. 

As a PEO employs staff at many different client companies, it is in a position to purchase health insurance ‘as a collective’. This greater purchasing power often means the PEO can negotiate better health insurance coverage than any individual client company could get on its own. We discuss this feature in more detail below. 

What are the Benefits of PEO Insurance? 

The benefits of PEO insurance include: 

  • Plans at a reduced cost
  • With PEO insurance, the PEO becomes the ‘sponsor’ of a healthcare plan. As the PEO may have hundreds of employer clients, they have enhanced purchasing power to acquire high quality health insurance for employees, with affordable premiums. 
  • For example, imagine that a PEO has ten clients with 10 workers each. Health insurers would deem that PEO as having 100 employees.  Insurers consider it less risky to insure 100 employees, compared to ten, so will usually offer lower premiums to the PEO than it could to any of the individual businesses.
  • Compliance
  • Insurance obligations are complicated. This is especially problematic for smaller businesses who lack internal compliance/legal/HR capabilities. It is also a major problem for business operating internationally where they may not be completely familiar with compliance obligations in another jurisdiction
  • Employer of Record features
  • PEOs provide comprehensive payroll and HR solutions: They don’t just take care of insurance. 
  • When you engage a PEO as Employer of Record for your staff, the PEO becomes responsible for all payroll, withholding employee income and payroll taxes, and general HR issues: When a PEO takes care of everything, it leaves you space to focus on your core business. 

What Are the Disadvantages of PEO Insurance? 

The disadvantages of PEO insurance might include: 

  • Limited flexibility in coverage 
  • As a PEO will often purchase its insurance ‘in bulk’, as it were, they may not be very flexible in the coverage that they can provide to individual employees.
  • Legal or compliance risks
  • Sometimes national legislation or regulations do not make it clear exactly who counts as the legal employer for insurance purposes. In these cases, there is a risk that a PEO arrangement will not satisfy legal requirements. 
  • For example, the Patient Protection and Affordable Care Act (‘Affordable Care Act’) in the USA requires that employers of a certain size (more than 50 fulltime equivalent staff), must provide an adequate healthcare plan for employees. This is known as the ’employer mandate’.
  • A statutory definition of employer is not used in that Act, therefore a ‘common law’ definition applies. That is, the definition developed by the courts in successive case law (and applied by agencies like the IRS).  This definition focuses on the degree of control exercised by the would-be employer. 
  • There is a risk that, upon audit, the client business will be deemed to be the employer, rather than the PEO, making the client business liable. 
  • This risk can be mitigated by carefully setting out the responsibilities (and indemnities) offered by the PEO in the engagement agreement with the client company. 

Frequently asked questions

There are many different types of insurance that a company can offer to its employees. Sometimes this is compulsory, and sometimes it is offered as an additional benefit to employees. This might include health insurance, workers compensation, disability insurance, unemployment insurance and life insurance. 

Companies can seek out insurers directly, engage insurance brokers, or use a PEO to acquire insurance for employees. Where the PEO is used to acquire insurance the insurance is sometimes referred to as ‘PEO insurance’.

‘PEO’ stands for ‘Professional Employer Organization’. These companies, sometimes known as ‘umbrella companies’ or ‘staffing agencies’, provide comprehensive payroll and HR solutions for client businesses. 

Commonly a PEO acts as an ‘Employer of Record’ on behalf of a client business: This means becoming the legal employer of the workers in that client business and being responsible for payroll, employee income tax, payroll tax, compulsory social contributions and so on. 

For more information check out What Does PEO Stand For? 

A PEO medical plan means that a Professional Employer Organization is providing a medical or healthcare plan to employees, rather that the company that the individual works for on a day-to-day basis. 

They can be. 

A ‘TPA’ or ‘third party administrator’ is an organization which helps a company who has decided to self-fund insurance for their employees. It is quite common for PEOs in the US to provide TPA services.

By managing the compliance risks of self-funding, a TPA can provide a cost-effective insurance solution for some businesses. 

Choose PEO Insurance with an International Employer of Record

PEOs often provide many forms of PEO insurance as part of their benefits administration services to client companies. 

Horizons provides full-service Employer of Record and PEO solutions, ensuring that employees get excellent international health insurance coverage in full compliance with local laws. 

Contact us now for more information.