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Key Takeaways

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

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

03. PEO insurance has pros and cons, and every company needs to consider whether it is better to engage a PEO or 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?

Employers are often required to provide health insurance in countries like the USA and Germany. In arrangements with a Professional Employer Organization (PEO), which offers comprehensive payroll and HR solutions, these obligations may shift from the client company to the PEO. This is especially true in international contexts, where these organizations are called Global or International PEOs.

While health insurance isn’t mandatory in all countries, many employers still provide it as an expected benefit or as an optional incentive to enhance employee recruitment and retention. For instance, private health insurance can exempt employees from certain taxes in Australia, where there’s public healthcare. Similarly, in Canada, private health insurance is a common optional benefit.

Besides health insurance, PEOs may also handle other types of insurance, including:

  1. Workers’ Compensation: This insurance provides wage replacement and medical benefits to employees injured at work.

  2. Disability Insurance: This type offers financial support in case an employee becomes disabled and unable to work.

  3. Life Insurance: This pays a sum to the employee’s beneficiaries upon their death.

  4. Unemployment Insurance: Typically jointly funded by employers and employees, this provides financial support during periods of unemployment.

 

Why Should a Business Choose PEO Insurance?

Employers initially embraced PEOs for the advantage of delegating the complex task of managing health insurance obligations, allowing them to concentrate more on their core operations.

However, the role of PEOs has evolved to become a strategic choice for securing superior healthcare benefits for employees. This is particularly vital in countries like the US, where mandatory health insurance can be a financial strain for smaller businesses.

PEOs, representing multiple client companies, possess the collective bargaining power to negotiate more favorable health insurance terms than individual businesses could achieve independently. This collective buying capability allows PEOs to secure enhanced health insurance options, offering significant value to the companies and their employees they serve.

How Does PEO Health Insurance Work?

When you opt for health insurance through a Professional Employer Organization (PEO), the PEO sponsors and manages your healthcare plan, leveraging their collective bargaining power by representing numerous employers and their employees, PEOs can negotiate for higher-quality health insurance plans at more affordable rates. While the range of plans might be narrower, the cost savings can often outweigh the reduced selection.

In a co-employer arrangement with a PEO, your employees are effectively part of the PEO for benefits and tax purposes. This allows access to premium healthcare coverage at more favourable rates due to the PEO’s pooled buying power.

How Is a PEO Different From an Insurance Broker?

An insurance broker is a state-licensed individual who assists your business in shopping for health insurance. Unlike PEOs, which provide a suite of HR services, brokers focus solely on finding and recommending health insurance plans. They will outline various plan options and costs, but the decision to enrol and manage the plan remains with you. Brokers can be a useful resource for businesses exploring various insurance options tailored to their specific needs.

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. 

Compliance

Insurance obligations are complicated. This is especially problematic for smaller businesses that lack internal compliance/legal/HR capabilities. It is also a major problem for businesses 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 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. 

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 employees get excellent international health insurance coverage in full compliance with local laws. 

Contact us now for more information. 

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. 

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