06 Aug HR Outsourcing Costs – PEO Bills – Fully Bundled Billing
Professional Employer Organizations (PEOs) have various methods of billing their clients.
This series will help clients understand the differences between these various methods in order to make more informed decisions when shopping and comparing vendors.
Percentage of Payroll – Fully Bundled
Fully Bundled Billing is when the PEO bundles every individual cost component (administrative fees, payroll taxes, worker’s comp insurance, and the employer’s contribution to benefits) into one percentage, and assesses that percentage as a charge on each employee’s amount of income.
This is by far the most confusing and non-transparent methodology of billing in the PEO industry, and it is becoming less and less popular. In most scenarios finding the individual cost of any component is not openly communicated to clients. Many PEOs will present their costs in this manner unless requested to do otherwise.
In most cases each employee will have their own percentage, and this will be dependent on a few factors: (Note that in some cases a percentage is assessed for the entire employee base, or for a group of employees that falls into a specific workers comp class code, both of these methodologies, more so the first, are extremely non-transparent and clients should request to see other methods of billing.)
· How much income they earn
· The Worker’s Compensation classification code they are in
· Which State they work in: (1): Workers Comp classes vary across states
· Which State they work in: (2): State Unemployment Insurance taxes vary across states
· The benefit plan they’re utilizing – (HMO, POS, etc.)
· The benefit tier they’ve elected (employee only, family, etc.)
· Any supplemental benefits they’re using and the associated tier (Dental, family plan)
Advantages: If you’d rather keep things simple this is a good option – companies that do not mind are usually venture-backed, non-profits, and staffing companies that forward internal costs directly to clients.
Disadvantages: Not breaking out each individual cost component can be frustrating for a business that demands to know exactly what they’re paying for. It can also lead to various reporting issues; especially when reporting labor costs and/or tax burdens to a board of directors, or for government contractors.
There is also much room to bury extravagant fees, many PEOs that use this methodology will purport very low health insurance costs, but then charge non-competitive administrative fees, worker’s comp rates, even higher state unemployment rates to make up for it.
Two Type of Fully Bundled Billing: With cut-offs, and Without cut-offs.
“Cut-offs” refers to payroll taxes and the income thresholds they adhere to. For example as of 2010 the FICA tax in for Social Security is 6.2% of all income up to $106,800.
With cut-offs:
The PEO adjusts the employees’ billing percentages by the specific tax thresholds they meet throughout the course of the year. The first payroll of the year should be most expensive (the highest percentage), and the payrolls towards the end will be cheaper (lower percentages).
With cut-offs Signs of danger:
If a PEO utilizes fully bundled billing with cut-offs, clients should pay very close attention to each employee’s billing percentage on each payroll. Theoretically, the percentages should get lower throughout the course of the year in order to represent when employees break out of certain payroll tax thresholds. For example, in New York the state unemployment tax cuts off after an employee has made $8,500, once an employee has earned more than this, the percentage should be adjusted. The amount it is adjusted by should be equal to the state unemployment tax rate the client is being assessed for the specific state. Unfortunately this is not always the case, often percentages sporadically adjust with no apparent rhyme or reason.
Without cut-offs:
The PEO is not going to adjust each employee’s percentage throughout the course of the year; instead they will average the percentages into one flat percentage that remains constant for the entire year.
Without cut-offs signs of danger:
For high income employees, especially those who earn more than $106,800 (FICA – Social Security cutoff), clients must be very careful that they’re not being overcharged with a billing percentage that doesn’t cutoff, even though the payroll tax burden is very low. Be extremely careful when income levels for employees go up, and the PEO doesn’t lower the percentages. There have been many cases where clients feel very comfortable with their PEO, only to find they’ve been overcharged for years when they finally open up to consider and compare what is available in the competitive landscape.
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