By Roccy DeFrancesco, Esq.
I just completed researching Professional Employer Organizations (PEOs) and have found them a terrific way for medical practices to save money on health insurance and worker’s compensation insurance, and as a way to outsource the issue/liability of OSHA compliance.
A PEO is a company that is created to house employees and to provide benefits to those employees. Small employers (less then 150 employees), have very little, if any, negotiating power with either health insurance carriers or worker’s compensation carriers. This has been evidenced painfully in the last several years with small employers receiving sometimes 75 percent increases on both health insurance and worker’s compensation insurance premiums.
The PEO was created to house/employ your employees. In effect, your current employees would become employees of a large PEO and they would be leased back to your office where they would work under the medical office as they do normally.
When your employees become employees of a 20,000-employee PEO, your employees then fall under the health insurance plan of a 20,000-employee PEO that has tremendous leverage with which to negotiate health insurance premiums. That holds true as well with the worker’s compensation insurance.
Additionally, the PEO would also do the payroll for your office and your office would simply cut one service fee check on a bi-weekly or monthly basis to the PEO who would, in turn, pay the employees including the physicians as your current practice does today.
Most small- to medium-size employers do not have the resources (or choose not to allocate resources) to hire a full-time HR/OSHA compliance officer. While having a nurse or the office manager take care of the HR/OSHA compliance burden is nice, what would be better is if that burden and liability was completely outsourced to a third party.
By having your employees become employees of the PEO, the PEO then has the burden and liability of the HR/OSHA compliance issues.
Cost of the PEO
I reviewed PEOs about three years ago when I still was running the orthopaedic practice in Bloomington, IN and I could not figure out how the PEO made their money. CNA Insurance Co. came in to “pitch” me on the PEO idea. I told CNA that if our office could break even on the health insurance and the worker’s compensation, I would sign our office up for the PEO just to outsource the OSHA compliance and to outsource the burden and liability of having to do payroll. CNA’s pitch to me was that the service was basically free and that CNA made their money from the commissions on the health and worker’s compensation insurance. Being a skeptic at heart, I didn’t believe that, and so it took me nearly two months to figure where CNA was really making their money.
Most PEOs make their money from a spread on the payroll. By that, I mean, if a nurse made $30,000 a year and the fee for the year for that employee was one percent, the cost would be $300. The problem with that scenario is that if there is no cap, physicians with varying income have varying amounts taken out of their paycheck to pay for the PEO fee. Additionally, there are typically no “caps” for high income earners; so that if a doctor made a million dollars a year in W-2 income, the fee would be $10,000 that came out of that doctor’s pocket if the fee was one percent.
Needless to say, when I figured out how CNA really made their money, it was evident that the PEO was not going to save us enough money on health insurance and worker’s compensation insurance to justify the fee.
A Better PEO
I recently found a PEO that has a cap on their fees for high income earners. The cap is $100,000; so no matter if the physician makes $100,000 a year or $1,000,000 a year, the annual PEO fee for that physician is going to be $1,000.
Typically, when you run the numbers with the fees being capped, the PEO can save your office enough on health insurance and worker’s compensation insurance to justify its use.
If your office has been hammered by runaway health insurance costs and worker’s compensation costs, your office should seriously consider looking at a PEO.
If your office likes the concept outsourcing the HR/OSHA compliance issues and liabilities, then you should look into a PEO.
If your office would like to outsource the payroll responsibilities and liabilities, then you should look into a PEO.
Income Tax Reduction
Lastly, and possibly most important for the physicians, is income tax reduction. One particular PEO in the country has the ability to incorporate a deferred compensation plan to help highly compensated employees or owners reduce their current income taxes and fund a supplemental benefit plan.
The deferred compensation plan in PEOs allows key employees to reduce their income from $10,000 to upwards of $300,000 a year where 90 percent of that money goes into a supplemental benefit plan for use in retirement. The income tax savings are unparalleled as is the amount of money available from the plan in retirement.
Roccy DeFrancesco, Esq., is President of The Wealth Preservation Group, LLC in New Buffalo, MI and is author of The Doctor’s Wealth Preservation Guide.