PEOs vs. Insurance Brokers for Health Benefits

Affordable comprehensive health benefits aren't cheap, and small businesses lack the buying power that large corporations have. Using an insurance broker or a professional employer organization (PEO) for health insurance can eliminate the time-consuming process of finding and negotiating medical policy terms. Both services help companies compare health insurance rates. But the similarities end there.

A PEO is an extension of your human resources (HR) department and is a co-employer. Insurance brokers are independent advisers or part of a brokerage group. This comparison of a PEO versus an insurance broker evaluates the pros and cons of both options and examines the types of companies that are most likely to benefit from each HR service.

What is PEO health insurance, and how does it work?

As a co-employer to hundreds or thousands of employees, PEOs have the buying power of a Fortune 500 company that a small- to midsize business (SMB) lacks. This aspect reduces PEO health insurance rates while giving companies comprehensive large-group benefits coverage.

The top question that SMBs ask is "What is a PEO in insurance?" A PEO is a health plan sponsor and administrator. A PEO establishes and maintains the benefits plan for employees and participants. You select the insurance carrier and policy with guidance from HR experts. Then the PEO deals with the backend work, including enrollment and claims management.

In addition to medical, dental, and vision plans, PEOs typically offer disability insurance, retirement accounts, life insurance, and other perks. You control daily operations and oversee your workforce, but the PEO is the employer of record for benefits administration and taxes. So when choosing a PEO, insurance is only one factor.

[Read‌ more: 5 Things You Need to Know About Choosing a PEO]

Pros of using a PEO for health benefits

When companies need lower insurance rates and higher-quality coverage and want to outsource HR, PEOs are a compelling solution. Businesses that purchase open-market insurance plans can pay more, because they lack the buying power of large enterprises. As co-employers, PEOs partner with big-name insurance companies to offer clients master policy plans at cost-effective rates.

If you want to offer health insurance through a PEO, consider these advantages:

• PEO health insurance rates could be lower. Insurance providers determine premiums based on risk profiles, and larger companies spread risk among more people, resulting in lower fees. PEOs leverage economies of scale, so any sized business benefits.
• Employees can access high-quality coverage. Open-market health insurance plans offer limited coverage levels and options, whereas nationwide insurance carriers provide more policies and customization.
• PEOs have a range of benefit offerings. You have plenty of options for PEO insurance, meaning your business can add employee assistance programs or flexible spending accounts.
• Employers save time on benefits administration. PEOs submit documents to the underwriters and handle new hires, open enrollment periods, and policy renewals.
• PEOs equip SMBs with technology. Your staff can pull reports to see how employees use benefits, while your workforce can use mobile apps to access policy information or update records. This makes PEOs ideal for attracting new hires and reducing turnover.
• PEOs assist with insurance compliance. Monitoring compliance requirements across one or more states is challenging. PEOs offer live support, frequently updated software, and risk management tools.

Cons of using a PEO for health insurance

Although PEOs can help grow your business, there are downsides to consider. In some cases, the return on investment can outweigh the disadvantages, whereas in other situations, it makes more sense to choose an insurance broker over a PEO service.

A few drawbacks of relying on a PEO for insurance include the following:

• PEOs require monthly fees. The base fee is usually a percentage of your total payroll or a flat fee per employee to cover administrative costs. Rates vary, with experts estimating 2% to 12% of monthly payroll or $50 to $250 per employee.
• Businesses give up some control. PEOs handle your data and HR processes, meaning your team doesn't gain institutional knowledge or have complete oversight about which insurers they work with or how they manage changes.
• PEOs only work with some insurers. Unlike brokers, PEOs only work with select insurance companies, and these offerings may not be suitable for your region or industry.
• Transitioning away from PEO insurance is challenging. Switching PEOs or moving HR in-house is like starting from scratch, depending on the offboarding systems your PEO offers. It can disrupt insurance or have tax implications.

[Read more: Everything Your Small Business Needs to Know About Choosing a PEO]

Who is PEO insurance best for?

The PEO model can serve businesses of all sizes. However, it's generally preferred by companies with 10 to 100 employees that have been in business for five to 10 years. Plenty of outliers also find success through PEOs.

Indeed, the National Association of Professional Employer Organizations said, "More than 15% of all employers with 10 to 99 employees partner with a PEO." Industry research showed higher survival rates for startups that partner with PEOs and improved employee retention rates.

When looking for employee health insurance, PEO services are best for:

• Companies with limited HR resources: If your team lacks time to research insurers and policies, manage payroll, and assist employees with insurance enrollment and eligibility questions, consider outsourcing HR and benefits administration to a PEO.
• Fast-growing startups: While founders and CEOs focus on innovating products, developing culture, and defining their brand, PEOs implement HR software to administer healthcare benefits and track insurance trends and usage.
• SMBs with complex workforces: PEOs help small businesses streamline payroll and insurance administration when interfacing with staff in multiple states or supporting a mix of 1099, salaried, and hourly workers with different benefits packages.
• Businesses that want to differentiate their offerings: Professional consultants, financial services, and information technology firms can add wellness perks or adjust health plans to attract high-quality job candidates.

What is an insurance broker?

Insurance brokers are licensed professionals who act as the gateway between businesses and insurance companies. Some specialize in group health or life insurance, but most offer several types.

An insurance broker can work independently or through a brokerage firm. Unlike agents who represent one insurance company, brokers aren't beholden to any provider. Think of them as advisers, not salespeople.

Business owners' top question about health insurance brokers is "How do insurance brokers work?" They learn about your company's needs, including your budget, coverage, and benefit requirements.

Most conduct a general risk analysis to estimate the claim costs. Next, brokers research health plans and share their recommendations. They help you compare options and costs while answering questions.

Insurance brokers can also help with setting up healthcare plans and managing claims. Some provide compliance resources and value-added services.

[Read more: Offering Employee Benefits? Here's How to Afford Them]

Pros of using an insurance broker for health benefits

Brokers deliver when businesses want insurance options and expertise without being locked into a long-term contract. Indeed, Zywave's broker services survey reported that almost 86% of respondents were "either satisfied or very satisfied with their insurance broker's services."

The top advantages of using an insurance broker include the following:

• Brokers provide personalized expert support. Their hands-on client service, industry wisdom, and comprehensive explanations of insurance terms increase institutional knowledge while ensuring your business has the information needed for decision-making.
• Commercial insurance brokers are inexpensive. Health plan carriers pay brokers a commission, so standard broker services have no upfront costs. However, they may charge extra fees for ongoing advisory services and enrollment support.
• SHOP-registered brokers help companies obtain tax credits. You can lower insurance costs by leveraging tax deductions. Brokers help you find Small Business Health Options Program (SHOP) insurance plans and complete the Small Business Health Care Tax Credit application.
• Brokers share money-saving alternatives. Although PEO insurance may be cheaper, brokers might offer a more comprehensive carrier selection and help you explore ways to reduce costs through health savings accounts (HSAs), self-funded plans, or telemedicine options.
• Group health insurance brokers may coordinate with carriers postsale. Some insurers provide broker technologies to guide employers through enrollment and renewals to better meet small businesses' needs.

Cons of using a health insurance broker

Insurance brokers are excellent for small businesses seeking advisory assistance, but they don't offer HR and benefits administration. Due diligence can alleviate potential drawbacks by ensuring you find a trusted broker who is familiar with your industry and a wide range of carriers.

Consider these downsides of using a broker for health insurance:

• The commission structure could affect carrier selection. Insurance providers pay brokers a commission on sales, which might lead some less ethical brokers to push businesses toward a higher-priced option even though it isn't the best choice for the business.
• Brokers offer less HR and compliance support. Although brokers help you understand regulations when buying insurance, they provide less assistance than PEOs after you have purchased a plan. You are responsible for enrolling employees and administering benefits.
• Insurance costs could be higher. Brokers excel at negotiating with insurers but can't overcome a small company's risk pool that increases out-of-pocket costs. They must work with carriers that insure businesses of your size.
• Technology capabilities differ between brokers. Not all brokers offer online portals for comparing policies, and after purchasing insurance, you use the insurer's software or your HR platform.

[Read more: 7 Health & Wellness Perks Employees Love]

Who is an insurance broker best for?

An insurance broker is best for small businesses wanting prompt service from trusted advisers offering a diverse healthcare plan selection. Zywave's survey noted that owners chose brokers who could "challenge or negotiate the renewal" and provided compliance resources.

According to the National Federation of Independent Business (NFIB)‌, "88% of small employers purchased or renewed their employer-sponsored health insurance through an agent or broker." However, an impartial health insurance broker reduces the time spent researching individual carriers and educates end users on the plans' advantages and drawbacks.

When comparing a PEO with insurance broker services, remember that brokers are best for the following:

• Owners who want to see all options before deciding: If you need help determining how your risk pool and budget affect premiums and coverage, brokers can help you explore all options, including Individual Coverage Health Reimbursement Arrangement and high-deductible plans.
• Companies with an internal HR department: If you have workflows for managing medical claims and enrolling new hires and don't want to outsource benefits administration, a broker is better than a PEO.
• Small businesses that want to claim tax credits: Certain brokers can help you find qualified plans and complete the paperwork if you qualify for health insurance tax deductions.
• Employers who prefer an adviser over a co-employment model: Brokers advise business owners and HR staff; they have no control over decisions, and you're under no obligation to them.

PEO vs. insurance broker: Which one should you choose?

Health insurance coverage helps companies attract and retain employees, but comparing your options and finding affordable plans are another battle. PEOs and brokers support this endeavor yet take different approaches. Understanding your objectives can clarify which service — a PEO or a broker — is the best partner in helping you choose small business insurance.

Here's a recap of the key differences between PEO and insurance broker services:

• Service fees: PEOs charge ongoing fees for HR services and support, whereas brokers typically have no upfront costs for standard services. Although PEOs cost substantially more than brokers, you get payroll services and benefits administration.
• Health insurance carriers: PEOs collaborate with specific insurers but can offer national coverage through large-group organizations. Brokers aren't tied to certain companies, but your business size limits carrier options.
• Medical plan rates: PEO health insurance premiums and out-of-pocket costs can be lower than going through brokers. You benefit from economies of scale with PEOs, which reduce fees.
• Compliance: Brokers help you meet insurance obligations, and some provide ongoing resources. However, only PEOs take on some legal compliance burdens as co-employers.
• Insurance claims: Although some brokers assist with claims, this service isn't as comprehensive as that provided by PEOs. Using a PEO means they handle most employee issues and claims management.
• Taxes and credits: The co-employment model through PEOs means they claim employee wages under their federal employer identification number, and businesses may not qualify for certain tax deductions. Brokers don't affect taxes.
• Technology: While PEO services include HR software for managing employees, payroll, and training, brokers usually only provide a customer portal for comparing health insurance plans or renewing policies.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Join us on October 8, 2024! Tune in at 12:30 p.m. ET for expert tips from top business leaders and Olympic gold medalist Dominique Dawes. Plus, access our exclusive evening program, where we’ll announce the CO—100 Top Business! - Register Now!

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

RSVP Now for the CO—100 Small Business Forum!

Discover today’s biggest AI and social media marketing trends with top business experts! Get inspired by Dominique Dawes’ entrepreneurial journey and enjoy free access to our exclusive evening program, featuring the CO—100 Top Business reveal. Register now!

Register now!