Professional employer organizations (PEOs) and insurance brokers help small business owners manage their HR and benefit administration needs. Here are some of the key differences between the two.
Both an insurance broker and a professional employer organization (PEO) can provide expertise on navigating the employee benefits landscape.
However, PEOs offer more general benefit help and handle health insurance, retirement savings, and payroll, among other HR concerns. Insurance brokers, on the other hand, focus on health insurance.
Depending on what kind of benefits administration you need, either an insurance broker or a PEO may be a better fit for your business.
This article breaks down the similarities and differences between PEOs and insurance brokers to help your search. For more information about the kinds of benefits you might offer workers, read our study on employee benefits.
What Do PEOs and Insurance Brokers Have in Common?
PEOs and insurance brokers are like two kinds of HR outsourcing.
When you outsource, you pass off time-consuming and technical tasks to experts at another company, then pay them for their work. It’s similar to outsourcing app development or web design to an independent contractor.
PEOs and insurance brokers are like outsourcing for HR.
PEOs and insurance brokers share several characteristics:
- Both insurance brokers and PEOs are highly knowledgeable about the healthcare market.
- Both take care of your insurance needs for your business.
- Both take on some of your company’s responsibilities and financial/personal information.
Difference Between PEOs and Insurance Brokers
Insurance brokers and PEOs are also different in several key ways.
1. Area of Focus: PEOs Offer Cheaper Insurance Plans, But Less Expertise
PEOs typically handle many HR responsibilities, including:
- Employee issue resolution
Most PEOs portray themselves as catering to all HR needs, but if you’re looking into PEOs, make sure you know the exact services your potential partners offer. If you know you’ll need help with recruiting, for example, pick a PEO with the most talent network resources.
When it comes to health insurance, a single PEO will likely carry plans from just a few providers. This means that it offers your employees a limited range of plan options.
Limited plan options can be helpful since they cut down the vast number of health insurance plans available. If an employee can choose from over 100 plan options, for example, he may not know where to start and become disheartened by the learning curve of understanding the insurance market.
However, employees who want a high level of control over their health plans may find these limitations stifling.
On the other hand, PEOs are legally capable of bargaining for health plans as if they were businesses with thousands of employees. That means a PEO’s health insurance options are usually cheaper than an insurance broker’s.
Insurance brokers, as their name suggests, focus on health insurance policies. There are two types of brokers: retail and wholesale.
- Retail brokers go to various insurance providers and look for the best quote they can find for you or your business.
- Wholesale brokers provide specialized types of insurance. If your business transports dangerous goods, for example, you might look for a wholesale broker.
Brokers work with many insurance networks and know the ins and outs of most providers. They will be able to find the best plans for you and your employees, though these plans might not be the cheapest.
If you have specific insurance needs, then an insurance broker may be a better fit.
2. Co-employment: PEOs Require a Unique Employment Structure
PEOs require a legal structure called “co-employment,” in which your employees become the PEO’s employees as well. This allows a PEO to assume your tax information.
Co-employment is the same structure that staffing and temp agencies use and is not unique to PEOs. However, co-employment does present a distinct set of potential problems.
In an ideal PEO-business situation, the PEO does not get involved in its clients’ day-to-day activities. The lines are clear about what tasks fall to the PEO.
However, if one of the co-employers (either the PEO or the client) doesn’t fulfill its legal expectations, it can be difficult to resolve conflict. If an employee has not been paid enough, for example, and files a complaint, it’s possible that both co-employers will be considered responsible.
In addition, bad communication from either side can throw off HR operations. Cameron Keng’s cautionary tale about Insperity, a large and popular PEO, is a good example.
Keng’s client, Horizon Health Center, chose Insperity as their PEO. The day before the co-employment plan began, though, Insperity insisted that Horizon pre-pay significantly more than they had previously asked for. This put Horizon in a perilous financial situation, and they cut ties with Insperity.
If you want to hire a PEO, ask candidates questions like:
- How do you interpret co-employment?
- What specific tasks will you handle for my business?
- If we disagree on benefits administration, how do we settle the problem?
Insurance brokers do not co-employ their clients’ employees. If you decide that an insurance broker is the best fit for you, you don’t have to worry about this legal structure.
3. Payment Structure: Percentage or Commission?
PEOs tend to ask for a percentage of employees’ salaries (normally between 2% and 6%) as payment. They may also ask for a flat fee per employee.
Insurance brokers, on the other hand, are paid on commission. They make their money from premiums that insurance companies charge their policyholders.
Both a PEO and an insurance broker should provide you with legal documents that state exactly how much they’re charging you, and whether they’re charging by commission or by employee salary percentage.
PEOs and insurance brokers should state exactly how much they're charging
If your broker or PEO does not give you these documents, it’s okay to ask for them.
PEO or Insurance Broker: Which is Better?
Depending on how much responsibility you want a benefits partner to assume, and what kind of specialization you’re searching for, either a broker or a PEO may be a better fit for your business.
If you’re only looking for help with health insurance, and you know that you want to offer tailored, highly customizable options to your employees, look into insurance brokers.
If you want to outsource more HR functions, seek a PEO. Just know that not all PEOs offer the same services.
In either case, you’ll be able to pass part of your HR burden on to someone who specializes in getting the best possible benefits for employees at many businesses.