Peo 401K: Benefits, Process, Cost, and More!

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You are not alone if your organization is overwhelmed with HR and administrative tasks. Several companies have considered outsourcing their HR and operational activities, and PEO is one of the best ways to get this done. According to noted economist Laurie Bassi, firms that utilize a PEO have 40% better revenue growth, 14-16% lower turnover rates, and are 50% less likely to go out of business than those that do not employ a PEO.

So, what is a PEO? A professional employer organization (PEO) is a company that provides a range of HR and payroll services to small and medium-sized businesses. PEOs are often used by businesses that need more resources or expertise to manage HR and payroll in-house.

PEOs typically offer employee benefits, payroll processing, tax compliance, workers’ compensation, and HR support. By outsourcing these functions to a PEO, businesses can focus on their core operations and leave the HR and payroll tasks to the PEO. PEOs can also negotiate better rates for employee benefits and other HR services due to their size and purchasing power.

What is a PEO 401K?

The only retirement plan that a PEO is legally allowed to offer is a defined-contribution plan, such as 401(k). A PEO 401(k) is a type of retirement savings plan offered by a professional employer organization (PEO) to a company with at least one employee other than the owner. Self-employed owners currently cannot join a PEO-operated plan.

retirement financial plan risk assessment senior concept

The PEO 401(k) plan is typically set up as a defined contribution plan, which means that both the employer and the employee contribute money to the plan regularly. The money in the plan is then invested in a selection of investment options, such as mutual funds, stocks, and bonds, to grow the balance over time so that it can be used to provide a guaranteed source of income to the employee during their retirement. 

The PEO 401(k) plan is designed to be an easy and cost-effective way for small businesses to offer their employees a retirement savings benefit. Plus, contribution to the 401(k) is tax-free until distribution, making it ideal for employees and employers.

The Standard Process of Onboarding a PEO

A PEO can help a business with 401(k) plans by providing a turnkey solution for setting up and managing the plan. The process typically works as follows:

  1. The business gets into a contract with a PEO. It expresses an interest in setting up a 401(k) plan (which can be an add-on along with other administrative and HR activities).
  2. The PEO provides the business with information about the different 401k plan options, including the costs and investment options.
  3. The business can select the 401(k) plan best suits its requirements and communicate it to the PEO.
  4. The PEO then sets up the 401(k) plan and manages the day-to-day administration, including new enrollment, processing contributions, handling investment changes, and providing employee support.

By working with a PEO, a business can easily set up and manage a 401(k) plan without investing the time and resources required to do it independently.

Benefits and Limitations of Using a PEO for Your 401(K) Plan

There are several benefits of a PEO 401(k), which include:

1.  Reduced fees

Since a PEO pools all its clients’ employees together to leverage the economics of scale, you get a better deal with a PEO than they would alone.

2.  Reduces the burden for compliance

The PEO takes complete responsibility for complying with regulations and being compliant. It includes handling reports and disclosures.

3.  No liability risks

Since the PEO takes full liability for transitions and funds associated with the 401(k) plan, you will not have to face liability risks in the long run. 

4.  Zero administrative burdens 

Since the PEO will take care of responsibilities including annual discrimination audit testing, maintaining adequate ERISA fidelity bond coverage, depositing employee contributions, loan deduction, filing of 5500 and other forms, distribution, and other administrative duties.

However, despite the many benefits of a PEO 401(k), there are a few shortcomings that companies need to be aware of. These include:

1.  Limited control:

As the PEO is responsible for managing the 401(k) plan, the business may have limited control over certain aspects of the plan, such as the investment options and the plan’s administrative processes.

2.  Potential loss of tax advantages:

If the PEO is not a qualified 401(k) plan administrator, the plan may not meet the requirements to qualify for certain tax advantages.

3.  The complexity of rules and regulations:

401(k) plans are subject to several rules and regulations, and it can be challenging for businesses to stay compliant. A PEO may help with this, but it is still important for the business to understand its responsibilities and obligations.

It is important for businesses to carefully consider these limitations and weigh them against the potential benefits of using a PEO 401k plan before making a decision.

Should You Use Your PEO’s 401K Plan?

Just in case you are wondering, there is a way to know if the PEO 401(k) is the ideal option for your needs, depending on the size of your business, the features of your plan, and the pricing of the PEO. For example, most PEOs will charge a flat fee for 401(k) plan administration services, while others can bundle it with the other services you are being offered, charging a percentage of the assets in the plan. 

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To determine whether using your PEO’s 401(k) plan is the right choice for your business, you should consider the following factors:

1.  Cost

Carefully compare the costs of using a PEO 401(k) plan vs. a standalone option, such as managing the plan independently or using a third-party administrator. 

PEOs can charge clients in two ways, per employee per month or using a profit-sharing model. When it comes to profit sharing, many PEOs offer 401(k) plans that allow employees to save for retirement, with contributions from both the employer and the employee.

According to CanalHR, the cost of a PEO can range from 2-11% of the total payroll, depending on the size of the business and the services provided. Assuming the company has an average size of 50 employees with a payroll of $50,000 per employee per year, the total payroll would be $2.5 million.

If the PEO’s fee is 3% of the payroll, the annual cost of the PEO would be $75,000. Contrast this with a company not using a PEO; the cost would be a minimum of $100,000 per year on HR, payroll processing, and other administrative costs. It represents a potential cost savings of $25,000 per year. 

2.  Plan features

Consider the investment options, contribution limits, and other features of the plan to ensure that it meets your business’s and your employee’s needs.

3.  Administrative benefits

Working with a PEO to manage 401(k) operations is easier and hassle-free. But if you plan on working with a PEO only for 401(k), you may evaluate the decision based on the features of a standalone plan. On the other hand, if you are already working with a PEO to outsource HR and administrative tasks, clubbing the 401(k) is the ideal option. 

4.  Employee satisfaction

Consider whether your employees will be happy with the 401(k) plan offered by the PEO, as offering a good retirement savings benefit can be important for attracting and retaining top talent. Most PEOs will have limited options since it has a standard 401(k) template for all its clients. 

Ultimately, the decision of whether to use a PEO 401(k) plan will depend on your specific business needs and circumstances. Therefore, it is important to carefully consider all of the factors and seek the advice of a financial professional, if necessary, before making a decision.

A Checklist for Choosing the Right PEO for Your Business Needs

financial analyst planning checklist

To summarise, here is a list of items that you should be looking into when choosing the right PEO for your 401(k) needs include:

1. Consider costs

Choose a PEO that offers retirement plans with low fees and excellent benefits, enduring you get the best value for money. The costs associated with using a PEO can vary depending on several factors, including the size of the business, the number of employees, and the specific services provided by the PEO.

2. Plan features

Ensure the plans significantly benefit your employees by understanding investment options, contribution limits, and other retirement plan features.

3. Ease of administration

Consider a PEO that makes administrative tasks around 401(k) effortless and hassle-free, providing support to your employees at all times.

4. Check the reputation of the PEO

Look into the reputation of the PEO and read reviews before getting into an agreement with them. Remember that changing 401(k) is not easy, so it should be done with proper consideration.

5. Employee benefits

Consider the other benefits that the PEO offers, such as health insurance and other employee perks, to ensure that they meet the needs of your employees.

6. Compliance

Make sure that the PEO complies with all relevant laws and regulations and that their retirement plan meets the requirements to qualify for tax advantages.

7. Customization

Look for a PEO that is willing to work with you to customize the retirement plan to meet the specific needs of your business.

Final Thoughts: Why a PEO-Sponsored 401(k) is a Smart Investment in 2023

To conclude, a PEO 401(k) plan is a great way to offer a retirement savings plan to your employees while offloading the administrative responsibilities to a PEO. Thus, it is designed to be an easy and cost-effective way for small businesses to offer their employees a retirement savings benefit.

PEOs, due to their expertise and special advantage or purchasing power, can negotiate better deals for employee benefits. It can be a good option for businesses that do not have the resources or expertise to manage HR and payroll in-house. But there are potential limitations to using a PEO 401(k) plan, such as limited control and potential loss of tax advantages. 

To choose the right PEO and 401(k) plan for your business, consider the cost, plan features, ease of administration, reputation, employee benefits, compliance, and customization.

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