The client had a PEO that uses bundled billing, an aspect of the service which the customer didn't fully understand. They were getting billed about 13% of the payroll for the PEO's clerical people. Business Administrative Consultants (BAC) chose to break out the billing for the client in order to be able to more clearly explain the areas from which this amount (13%) was actually being generated.
The Breakdown for Fees Generated through the PEO and Its Payroll Services
BAC discovered that the 13% included each of the following charges: FICA, federal unemployment, state unemployment, worker's compensation, and administrative fees. Once BAC pulled out the fixed costs, which included the FICA tax at 7.65%, the SUTA at 2.7%, the FUTA at .60%, worker's comp between .26 and .55% , depending on the code, what was left was about 2% for administrative costs. What this means is that the client is being charged approximately 2% of his overall two million-dollar payroll, which equates to $40,000 for administrative fees.
NO REASON FOR SUCH HIGH ADMIN
The only difference in services between this PEO and others is the way they deliberately buried their billing. Other PEO's are much more transparent. This actually means that the fees aren't justified and that the client might be able to save money switching to a new vendor that will provide the same services. These features typically include a robust Web portal, HR Services, Risk Management, EPL insurance and many other services, all of which would be provided for with lower administrative charges.
What Did BAC Discover in This Case Study?
BAC found that the client was being charged about $1,428 for approximately 28 employees. Since BAC was able to lower that amount to $715, it saved the client approximately $700 per employee.
This particular client was not in the high risk category (only used sales and clerical employees). The client was paying as a relatively new business, so lower SUTA rates were in place. No viable reason existed for them to be with a PEO at this particular point. This business owner only needed some HR services, which he could get from any number of payroll companies or ASOs that BAC represents.
Do You Need a PEO?
PEOs are great for companies who need to provide benefits like medical insurance, or need hard to write workers' compensation. In some cases companies that need high end HR or simply want help from a team of experts, PEO's make perfect sense. A PEO is may not be needed when a company doesn't need benefits or hard to write workers' compensation. We find that many companies that have been with PEO's for years are NOT getting a deal on benefits. In fact when we shop open market medical, we find out that in many cases clients with PEO's are paying more than they would without a PEO. Remember if your company is with a PEO on their master medical policy, the PEO is paying the claim out of their pocket in most cases. If you have had a few bad claims years they may try to recapture their losses by charging higher than market rates.
Are Your PEO Fees Too High?
How do you know if you are paying too much? You need a fee analysis from someone who is licensed and knowledgeable and experienced enough to recognize that certain fees are too high. It's not just about how much in admin fees your company is paying. You need to have all components of their billing analyzed. Since your company is paying a leasing fee, you are no longer paying taxes on your employees, the PEO is under their FEIN so they can and do charge more in many cases for SUTA and workers' compensation. Most clients aren't able to find a good answer as to whether or not they are paying too much unless they use the services of someone who is experienced enough to do so.
Even if a client's costs are only off by a one percent, it could make a big difference when you are dealing with payrolls of 2 million dollars or more. It equates to $20,000 in excess charges.
The Solution for Companies Looking to Save on Administrative Costs
Since you need to be a licensed agent to get a medical benefits quote on the open market, most clients need to use the services of a company like Business Administrative Consultants. Otherwise, the client would have to guess whether or not they are paying too much in administrative fees.
A typical business manager, business owner, or CFO won't be able to figure that out on his own, mainly because that is not their area of expertise. It is not what they concentrate on each day, so they don't have ready access to this type of data. However, clients need a full understanding of what their bill are in order to protect their financial interests. Since no charge exists for our cost analysis, it only makes sense for someone to get one in order to determine whether or not their fees are higher than they need to be.