Professional Employer Organizations: A Broker’s Guide

1. 2018 Atlanta Benefits And Financial Services Forum Professional Employer Organizations:A Broker’s Guide Gene Fidell | Regional President – Atlanta Adams Keegan, Inc.

2. A Brief History THEN… NOW… State Regulations (Model Act) Industry Governance (NAPEO) Co-Employment (PEO); or Sole Employer (ASO) Option • Wild Days of the 1980’s • Employee Leasing • Negative Legacy • Didn’t pay taxes • Didn’t pay premiums • Didn’t pay payroll • No checks and balances • No auditing • CA physician group testing • Employer Services Assurance Corporation (ESAC) • Formed in 1995 to develop stringent Operational, Ethical and Financial standards and procedures. Similar to FDIC for banking protections. (esacorp.org) • $15M surety bonds for PEO clients on behalf of ESAC member companies*

3. PEO Market Facts (napeo.org) • 27% of non PEO businesses offer retirement plans; compared to 95% of NAPEO member companies $136B - $156B Gross Revenues Nearly 800 PEO’s operate nationally, employ over 25,000 people internally. Estimated 180,000 small & mid-size businesses are paired with PEOs • Benefit of Workers’ Compensation administration reduces costs up to 25% Average number of NAPEO member clients is 23 employees • Operates in union and non-union environments alike; recognized by National Labor Relations Board (NLRB) PEOs enable healthcare access for 2.0M-3.5M people

4. Keeping Turnover Low and Survival High • Fact 1: The employee turnover rate for PEO clients is 10% to 14% lower per year than that of comparable companies. (napeo.org) • Fact 2: Businesses that use PEOs are approximately 50% less likely to fail (permanently go out of business) from one year to the next. (napeo.org) Why That Matters: • The average overall employee turnover rate in the United States was approximately 42% per year; PEO’s average 28%-32%. • Reduced turnover allows companies to retain knowledge and skills internally, simultaneously reducing substantial indirect training and productivity loss costs.

5. Contractual Relationships: PEO Co-Employment Relationship • Client: the Worksite Employer that owns and runs the business. Each PEO has a different approach to “direction & control” and “hiring / firing” of employees • PEO: the Administrative Employer with respect to employment taxes: FICA / Medicare, FUTA, SUTA. PEO can also serve as: • Named Insured Workers’ Compensation plan • Policyholder on Benefits plans • Administrator of Section 125, FSA, Dependent Care, 401(k) plans

6. Contractual Relationships: ASO Administrative Services Only = Sole Employer • Client: Worksite & Administrative Employer that owns and runs the business; no room for interpretation. • ASO: Performs services on a fee basis. Client maintains WC and employment tax status. ASO can also provide: • Ancillary Employee Benefits (adoption Agreement); a/o • Administrator of: Section 125, FSA, Dependent Care & 401(k).

7. PEO Products & Services Comprehensive payroll, benefits and human resource services for small and mid-sized businesses. • Employees of PEO clients gain access to employee benefits such as 401(k) plans, health, dental, life, FSA & dependent care, and other big company benefits. Makes small companies more competitive for talent. • PEOs help their clients comply with increasingly complex employment laws and regulations by providing policies & procedures and access to professional expertise at a fraction of the cost of in house HR Staff. • PEOs can provide services to manage risks and reduce costs related to WC, State Unemployment Claims and employment practice exposure.

8. PEO Products & Services (cont.) • Most PEOs provide clients with 24/7 electronic access to Payroll / HRIS / Benefits Admin and Time Management. • Proactive HR services provided by PEOs help prevent, or otherwise reduce, time & costs associated with employer-employee relations, claims, and litigation. • PEOs comprehensive employer services solution allows clients to reduce the time required to manage vendor relationships by consolidating the number of external providers. • Most importantly, by outsourcing non-productive employer requirements, PEO clients can more effectively focus on their companies’ growth and profitability.

9. PEO: Integrated HR Delivery Model • Integration of HR functions greatly improves execution and accountability • Each standalone piece represents different expertise and administration

10. PEO Buzzwords Billing Bundled or Unbundled % of payroll, or flat $ per employee per month Full Service Most PEOs have ALL services included in their fees; “use it or lose it” PEO ‘Light’ Few PEOs will reduce their monthly fees and charge for HR related services on an ad hoc basis; HR consulting, training and development E.P.L.I. Several PEOs will include Employment Practices Liability Insurance policies. • Aggregate limits are prohibitive; • Access can be restrictive • Outside markets remain competitive

11. PEO Buzzwords (cont.) FICA Differential Most PEOs charge the employer portion of FICA / Medicare against gross wages, not taxable (after pre-tax deductions) wages. SUTA Accounts Approx. 30 states require or allow client SUTA accts, not PEO SUTAs. Most others allow PEO to keep an account. SUTA Arbitrage PEOs may elect to charge SUTA rates that are higher than their actual Statutory SUTA rate to cover cost of administration or increase margin. Tax Restarts If a client begins a PEO relationship mid- year, they may restart FICA, FUTA & must re-start SUTA.

12. PEO Buzzwords (cont.) WC Coverage Most PEOs provide WC coverage on a fully-insured or self-insured basis. Check PEOs experience mod rate. Bill Reconciliation Many PEOs that work with Brokers will provide reconciliation, premium payment and COBRA administration for client sponsored plans.

13. PEO Buzzwords (cont.) Payroll/HRIS Did the PEO “make or buy”? Does the PEO outsource their payroll to another vendor or do they have a proprietary system? PEO 401(k) If matching options aren’t 100%, vested who gets the forfeiture if the client terms the PEO?

14. LARGE TRADITIONAL PEO Plans ADPTotalSource June 1 AlphaStaff September 1 Insperity Contract Effective Date (UHC) Oasis October 1 Paychex January 1 TriNet (SOI) Quarterly Effective Dates One size fits all PEOs are marketed featuring group health plans as the center-piece of the services platform. Typically offer one or two carrier plans. NOTE: PEO Carrier Options: Aetna, UHC ,and Humana dominate the market. UHC will apply “revenue neutral” underwriting to Insperity and ADPTS clients.

15. PEOs that workwith Brokers.Some may also have their own plans. Adams Keegan AlphaStaff CBS Einstein HR Engage HR Strategies HROI Insperity One Source Propel HR TriNet

16. ACA Compliance Questions 2 key CONCEPTS & industry implications

17. MEWA vs Single Employer Group • Is a health plan sponsored by a PEO, in which a PEO’s clients and their employees participate: (A) A multiple employer welfare arrangement (MEWA), or (B) A Single Employer Plan under ERISA for purposes of compliance with the Patient Protection and Affordable Care Act? • Based upon the IRS/DOL guidance issued in November 2012, wherein all non-grandfathered health insurance coverage offered through MEWAs is subject to the modified community rating rules applicable to the appropriate market: Are individual client-employers with fewer than 50 full-time equivalent employees (as defined by PPACA) that are participating in a PEO sponsored heath plan subject to community rating rules?

18. YES and YES Why and How: The omission of a specific IRS ruling on the matter is enabling PEOs to operate in a manner contravening the rulings, regulations and colloquy outlined, as follows:

19. Despite All This… • U.S. Department of Labor (USDOL) Advisory Opinions and Information Letter: Over the years, the DOL has issued multiple Advisory Opinions establishing PEO health plans as MEWAs. ERISA defines a MEWA as any group welfare arrangement in which two or more employers participate. In 2006, the DOL for the first time issued a written pronouncement that a PEO health plan arrangement constituted a MEWA. • Legislative Intent of PPACA: Within PPACA, the legislative intent behind the healthcare reform law is evidenced in the Congressional Record. • IRS Revenue Procedure Ruling 2002-21: In 2002, the IRS required 401(k) plans sponsored by PEOs to be multiple employer plans and not single employer plans. The IRS applied the decades-old common law test when making this determination. • The DOL Family and Medical Leave Act (FMLA) regulations:In 2008, the FMLA regulations changed dramatically with regard to PEO arrangements. Under the 2008 regulations, it is still the client, rather than the PEO, whose size will dictate eligibility for FMLA. So rather than consider the PEO as a single employer subject to FMLA, the DOL looks at the PEO arrangement as a multiple employer arrangement, taking a client-by-client approach with a PEO and its clients.

20. Industry Implications and Effect • If a PEO’s health plan is not considered a MEWA, and thus not subject to community rating rules, small employer clients of a PEO could avoid community rating rules that would otherwise apply to their health plans by joining the PEO’s health plan. • Further, a PEO could underwrite entrance into its health plan on a client-by-client basis thereby gate keeping access into the PEO’s plan based upon a given client’s particular health profile. This underwriting could result in federal and state health insurance exchange plans being adversely selected by higher-risk, small employers.

21. WHAT’s A Broker To Do? • Understand PEO health plans… • Learn which PEOs do what… • Be prepared to take action – Proactive or Reactive

22. Role of the Broker in Protecting the Business

23. Broker’s Audit List Choosing a PEO: Proactively enhance your client relationship, or Reactively “poke holes” in the PEO soliciting your client. About your Client • Assessment of the client organizational, HR and Risk Management needs About the PEO • Check to see if the PEO is a NAPEO member and/or ESAC accredited • Meet the PEO Service Team • Ask for PEO’s other client professional references • Scope of services, Depth of organization, and Longevity • Check the PEOs financials for: • Auditing practices • History of timely tax and premium payments

24. Broker’s Audit List (cont.) Choosing a PEO: Proactively enhance your client relationship, or Reactively “poke holes” in the PEO soliciting your client. Benefits Plans • How are the employee benefits offered? • Fully insured or partially self-funded? • Who are the carriers? • State approved? • Understand how employee benefits are tailored • Are multiple markets still the best solution? Contractual Agreements • Review the service agreement carefully • Articulate responsibilities and liabilities • Who is responsible for employee direction and control? • What are the guarantees? • Termination provisions • Broker Referral Agreements: • Non Compete • Non Solicitation

25. Buyer’s Guide to PEOs

26. A PEO Is Near Scenario 1 I have a client that’s been approached by a PEO. How do I react? Scenario 2 I would like to expand my role as a business consultant to my client. How can I approach the topic? What questions do I ask?

27. Thank You. Gene Fidell | Regional President - Atlanta gene.fidell@adamskeegan.com 770-709-7201 1100 Circle 75 Parkway – S.1510 Atlanta, GA 30339 www.adamskeegan.com ESAC Member