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Exiting a PEO: A Checklist of Considerations


05/16/19 – Many small to mid-size companies look for solutions to outsource certain aspects of their businesses due to a multitude of financial and staffing related concerns. To meet this outsourcing need, professional employer organizations (PEOs) provide their clients with an entire workforce or human resources management team over an extended period. A PEO can offer a variety of services and support for a company, including handling taxes, employee benefits, payroll processing, worker’s compensation, and administrative support, to name a few. For a small business, a PEO can significantly ease their administrative burden and provide compliance and risk management for the absorbed or new services.


While there may be many advantages to hiring a PEO, there may come a time where the PEO is no longer meeting your company’s needs. As your company grows and changes, there are some common reasons why exiting a PEO might be the right decision. Several reasons for leaving may include the desire for customization of employee benefits, cost, service, and full control of employee culture, relationships, records, and technology. Exiting a PEO may seem like a daunting task so it is important to involve the key players of your company in order to have a smooth transition. You must also take into account time when exiting a PEO, as many changes and systems will have to be operational before the exit. The below checklist touches on some of the most critical considerations when leaving a PEO.



Your company will need to have a payroll system in place before the transition to ensure uninterrupted service (timely and accurate paychecks). You will have to implement a payroll system by either hiring a payroll expert or finding a payroll vendor.


Timing & Taxes

There are some tax consequences when exiting a PEO mid-year. Employees are new employees for tax purposes during a mid-year switch, and FICA and FUTA taxes paid on each employee’s wages for the year under the PEO are not transferable and the wage base will restart at the time of transfer (essentially resulting in double taxation). However, employees can reconcile excess payroll taxes on their individual tax returns. If you are leaving a certified-PEO, a mid-year exit will not cause the tax consequences described above because you are a successor employer in this context.


Implementing HR Policies/Procedures and Updating Employee Handbook

After leaving a PEO, you will have many considerations regarding HR staff, policies and procedures. It will be necessary to update your employee handbook and any policies within the handbook that may have changed due to your transition out of the PEO. Your company will also have the responsibility of keeping abreast of employment laws and regulations (ex. FMLA and FLSA). It may be prudent to retain a legal professional to help draft your employee handbook and implement any new policies and procedures.


Workers’ Compensation

The ease of this transition will depend on your company’s risk profile and the worker’s compensation carrier. Coverage must be in place at the time of transition with no interruption.



Disengaging from the PEO may mean leaving their single source, integrated solution for technology. You will have to decide on replacement systems for the various HR and benefit functions that the PEO previously provided (whether this is a single source solution or multiple systems). Finding a good solution will depend on your company’s needs.


Establishing Your Own 401(k) Plan


Employment Practices Liability Insurance (EPLI)



After exiting a PEO, you will have to establish a new benefit package for your employees. Finding a good employee benefits advisor for this transition is a key element to success. Below are a list of legal obligations and requirements that go along with the implementation of an employer-sponsored plan:


The above list is not an exhaustive list of all of the considerations to keep in mind when exiting a PEO. IBTX can help make your exit from a PEO easy; we can help answer questions, offer guidance and help make every step of the transition a smooth one. If you are looking to exit your current PEO contact us at 800.880.6689 or


This Benefits Brief is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.

Posted by in Blog, Human Resources

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