As construction and real estate companies grow, many choose to partner with Professional Employer Organizations (PEOs) to streamline their human resources and insurance operations. However, there may come a time when a business decides to exit this relationship. While leaving a PEO can provide greater control over financial and employee decisions, it is essential to approach the exit strategically to avoid potential pitfalls.
Preparation is key when considering a PEO exit. Before providing written notice of cancellation, it’s crucial to engage a competent team of professionals, including legal, tax, and HR advisors, to navigate the complexities of the transition. A well-structured implementation plan will ensure a smooth exit and minimize disruptions to operations. One of the first considerations is the tax implications If you exit mid-year, the PEO will need to complete final taxes and provide W-2s for employees up to the termination date. Your employees will be considered new hires under your company, necessitating the reactivation of Federal, State, and local Tax ID numbers, as well as SUTA/FUTA accounts. Timing your exit at the end of a calendar quarter can help optimize the transition.
Maintaining uninterrupted workers’ compensation coverage is critical during this process. Before exiting, review any claims filed by employees and be aware of pending hearings. Some insurance carriers may view your business as a new startup, potentially affecting your risk rating and coverage options. Collaborating closely with your insurance advisor will help ensure timely coverage and avoid lapses. Additionally, selecting a new payroll provider is essential for uninterrupted service. Request employee data, hours worked for ACA compliance and ensure that personnel files are updated. Pay attention to the classification of independent contractors to avoid misclassification issues, and coordinate your benefits and workers’ compensation to prevent coverage gaps.
Transitioning employee benefits is another vital aspect of the exit strategy. Employees may need to transfer their PEO retirement plans into individual IRAs, so providing clear instructions will facilitate this process. Begin the transition to a new employee benefits package early, considering any waiting periods for new hires. If the PEO plan was self-insured, be prepared for potential issues with claims incurred before termination. Understanding the PEO’s responsibilities regarding COBRA for qualified participants is also essential, as clear communication with employees eligible for COBRA benefits will help manage expectations.
Moreover, it’s important to review the PEO’s policies on leave of absence and disability to ensure compliance with existing obligations, especially for employees on FMLA leave. As you exit the PEO, building or enhancing your internal HR infrastructure is vital. This may involve hiring additional HR staff, implementing new HR software systems, or outsourcing specific HR functions to effectively manage the responsibilities previously handled by the PEO.
Partnering with a specialized employee benefits broker who understands the unique needs of the construction and real estate industries can ensure a smooth transition and optimal benefits for your workforce. For more information, check out our employee health & benefits practice.
