As human resources (HR) concerns go, obtaining comprehensive but affordable health insurance for your employees is often near the top of the list for small business owners, but it can be difficult to obtain. Some small businesses opt for health coverage by partnering with a professional employer organization (PEO), which often provides other HR services as well, but at a high price. Other business owners turn to an insurance broker; so while the insurance costs are less, brokers do not offer other HR services, besides finding a good insurance plan for your team.
These distinctions can make it tough to decide between a broker and a PEO. Do you go the simpler, more affordable route of an insurance broker? Or do you invest in a PEO for higher-quality insurance?
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When obtaining health insurance through a PEO, it is the PEO that sponsors your healthcare plan. Since PEOs partner with hundreds, sometimes thousands of employers, they use that buying power to offer higher-quality health insurance for lower premiums. However, you typically have fewer plans from which to choose. The lower premiums, however, could save you enough money that the costs of hiring a PEO prove to be entirely worth it.
If a PEO has co-employer arrangements with, say, 30 clients with 10 employees each, the PEO counts as having at least 300 employees. Insurers view the PEO as less of a risk to insure than the individual businesses. The result is lower insurance premiums for the PEO, which can then pass these premium reductions through to you and your employees. In doing so, you’ll pay less than if you purchased plans as a stand-alone small business.
PEOs sponsor your company’s healthcare insurance, since they act as your co-employer. In this arrangement, your employees belong to your PEO for all benefits and taxation purposes. The same holds true for every company that uses a PEO, and that’s a large part of why PEOs can offer higher-quality coverage at better rates.
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Whereas a PEO is an HR firm, an insurance broker is licensed by the state where your business is located who can shop for health insurance on your company’s behalf. Your broker will recommend certain plans to you and detail how much you’ll pay for each plan. It’s up to you, though, to enroll.
Insurance brokers are paid a commission by insurers, and this income structure can affect which plans they offer you. Since brokers don’t earn money until their clients sign contracts with insurers, they have a strong incentive to find you the best plan possible. However, this incentive can also encourage brokers to only offer expensive plans in hopes of earning more money.
An additional concern with brokers versus PEOs is that the commission structure may limit the insurance brands a broker can connect you with.
If a broker doesn’t have a commission agreement in place with a certain insurance company, they can’t sell that company’s plans. This structure can artificially limit the plans available to you.
There are several reasons why you may prefer to choose PEO insurance over broker insurance, including:
Despite its advantages, PEO insurance isn’t perfect. Its downsides include the following:
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Among the reasons you may prefer an insurance broker to a PEO include:
Some reasons why broker-provided insurance may let you down compared to PEO insurance include:
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For many, but not all, small businesses, PEOs are the smarter option when it comes to health insurance, as PEO insurance is typically more comprehensive and less expensive. Additionally, the high costs you pay to hire a PEO are often worth the time and errors saved in your payroll, taxation and legal compliance.
If, however, your team is almost entirely young and healthy, brokers may better suit your needs. A young, healthy team may only need health insurance to keep their costs lower after a medical emergency, so broker plans may suit them. And by not hiring a PEO, you may save money overall – even if PEO insurance premiums cost less than broker premiums. However, you’ll need to find other ways to handle payroll, taxes and compliance if you forgo a PEO.
If PEOs sound like the right fit for you, read our guide to choosing the right PEO, then make a decision after reading our PEO reviews. Before you know it, you’ll have health insurance that satisfies both you and your team.