PEO
PEO vs. ASO: What’s Actually Different?
By Anthony Beck, . Insurance Wire.
A PEO and an ASO may offer nearly the same service package. Both can process payroll, provide HR support, administer benefits, manage onboarding and offer HR technology.
The difference is co-employment.
With an ASO, the business remains the sole employer and the ASO performs services on its behalf. With a PEO, certain employer functions can operate through the PEO’s structure.
That is what actually changes the comparison.
Payroll Taxes
Under an ASO model, payroll is generally processed through the client’s own federal and state tax accounts.
A PEO may instead report wages and employment taxes through the PEO structure, depending on the provider, applicable law and whether the PEO is certified.
State unemployment taxes can be especially important. An ASO client generally keeps its existing unemployment accounts and rates. A PEO arrangement may use the PEO’s unemployment structure instead.
For a company operating in several states, that can materially affect both administration and cost.
Health Benefits
An ASO can administer health insurance, handle enrollment and deductions, connect benefits to payroll and provide employees with benefits technology, but the coverage generally remains under the employer’s own group policy.
A PEO may instead provide access to health plans available through the PEO’s larger benefits program.
That can change the carrier options, plan designs, underwriting and pricing available to the employer.
For some companies, this is the biggest reason to consider a PEO. A business facing a large health renewal may find significantly better options through a PEO, while a company with strong standalone coverage may be better off keeping its existing plan.
This is also why comparing administrative fees alone can be misleading. The difference in health insurance cost can outweigh the difference in service fees.
Workers’ Compensation
The same distinction applies to workers’ compensation.
An ASO may calculate premiums, integrate them with payroll and assist with administration, while the employer keeps its own policy.
A PEO may provide workers’ compensation coverage through the PEO’s program.
That can change the carrier, rates, billing method, underwriting and claims process.
For low-risk office businesses, workers’ compensation may have little impact on the decision. For contractors, staffing companies and other higher-risk industries, it can be one of the largest financial factors.
Some businesses may also need to keep their own workers’ compensation policy because of contract requirements, carrier-rating requirements or industry-specific rules. In those cases, some PEOs can still provide payroll, benefits and HR while workers’ compensation stays outside the PEO arrangement.
HR Services
This is where PEO and ASO comparisons are often oversimplified.
An ASO is not necessarily a basic version of a PEO.
Either model may include payroll, onboarding, timekeeping, HR consulting, benefits administration, employee handbooks, compliance support, recruiting tools, performance management and employee self-service.
The service list alone does not tell you which model you are looking at.
The important question is whether the business is keeping its tax and insurance structure in its own name or moving some of those functions into a co-employment arrangement.
A Simple Example
Take a 50-employee company using an ASO.
The ASO processes payroll and provides HR support. The company keeps its own health plan, workers’ compensation policy and unemployment accounts.
Move that same company to a PEO, and those underlying programs may change. Health benefits may move to the PEO’s plans. Workers’ compensation may move to the PEO’s policy. Employment taxes may be administered through the PEO structure.
The payroll software and HR support could look very similar in both cases.
The economics underneath them may not.
Which Model Is Better?
There is no rule that small companies belong in PEOs and larger companies belong in ASOs.
A smaller company with strong standalone benefits and competitive workers’ compensation may have no reason to move those programs into a PEO.
A larger multistate company facing high health costs or administrative complexity may benefit significantly from a PEO.
The decision should be based on what the company already has, what it wants to change and whether the PEO structure improves the financial or operational outcome.
The Bottom Line
A PEO and an ASO can provide many of the same services. The difference is co-employment.
Related reading: PEO vs. traditional payroll and What co-employment actually means.
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