clock October 13, 2022

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What is the Difference Between a PEO and ASO?

According to the Bureau of Labor Statistics, the smaller a company’s headcount, the less likely it is to provide employee benefits.

For instance, nearly 85% of companies with 500 or more employees offer employee assistance programs. Meanwhile, only 31% of companies employing 1–49 workers offer these programs.

Employee benefits packages can make the difference between recruiting the best talent and hiring mediocre workers. But how do you provide a robust and meaningful benefits package when you don’t have the HR manpower to do so?

This is where ASOs and PEOs can come in. These third-party human resources vendors help businesses of all sizes select, manage, or administer employee benefits.

What is the difference between an ASO and PEO company? And which type of HR vendor is right for you? We are answering these questions and more below in our guide to ASOs vs. PEOs.

What Is an ASO?

“ASO” stands for Administrative Service Organization. ASOs help employers set up employee benefits, including worker’s compensation and health and wellness insurance plans.

As the name suggests, an ASO’s primary function is to provide administrative HR services to its clients. The employer will take on all the risks of reporting payroll taxes, sponsoring benefits plans, and more.

Some ASOs also help administer payroll. But because they do not require you to sign a co-employer agreement, you, the employer, must file payroll taxes. We will talk more about co-employer relationships when we explain PEOs.

Who Needs an ASO?

ASOs are great for companies of all sizes, especially those that need a little extra help with HR administrative duties. However, these companies will not sponsor your benefits plans.

Ideally, an ASO should replace a PEO as a company outgrows it. That means ASOs are best for companies with 25 to over 500 employees.

This type of vendor is also a good choice for companies that need assistance with HR administration but have a trusted benefits broker already.

What Is a PEO?

“PEO” is an acronym for Professional Employer Organization. These organizations sponsor insurance coverage and report wages on behalf of their clients. Some of the services offered by a PEO include:

  • Payroll processing
  • Health benefit selection and administration
  • Workers’ comp plan selection
  • Risk management

The exact services a PEO provides will be stated in the service agreement. However, PEOs are unique in that they require co-employer relationships.

In a co-employer arrangement, the employer will still maintain responsibility for some HR tasks. The PEO takes on the risk of reporting payroll taxes, sponsoring health benefits, and other HR duties.

In a co-employer relationship, your employees technically work for the PEO. This has to be the case for the PEO to sponsor benefits and track wages. But you still have full control over your employer-employee relationship.

That means you will have full control over your employees’ day-to-day activities. The only duties the PEO co-employer subsumes are the HR duties you agree upon in the service agreement.

Co-Employer Agreements: Explained

Co-employers are also known as third-party payers. Co-employer agreements allow the PEO company to report its client’s payroll taxes under the PEO’s Federal Employment ID Number (FEIN). Companies can also outsource unemployment tax work to a PEO.

PEOs also assume insurance benefit plan sponsorship under a co-employer agreement. They can select, manage, and administer benefits like health insurance, workers’ comp, dental and vision, disability policies, life insurance, and more.

However, it is important to understand that PEOs do not take on liability for:

  • Wrongful termination claims
  • Employee discrimination charges
  • Workplace harassment lawsuits

You can include a clause in the service agreement stating that the PEO must take responsibility for the administrative duties surrounding the above situations (e.g., filing answers). But the legal liability will fall on your business.

Who Needs a PEO?

PEOs are ideal for small- to medium-sized businesses with small or no HR departments. These professionals provide HR expertise and mitigate risk for your company by sponsoring various types of insurance policies.

Plus, PEOs offer these benefits all in one place. This makes PEO services more convenient and affordable than piecemeal-ing services together from different vendors.

For example, you do not have to hire a benefits broker and a benefits administrator. The best PEO will take on both of these duties for you.

Experts typically recommend PEOs for companies with fewer than 30 employees. Any business larger than that would not get the advantages a PEO can offer and should consider upgrading to an ASO.

What About HROs?

If you are looking into outsourcing your HR duties, you may come across another acronym: HRO. While we will not be comparing this type of HR vendor to ASOs and PEOs in this guide, we will briefly explain the HRO business model.

“HRO” stands for Human Resource Outsourcing. HRO companies are kind of like a hybrid between ASOs and PEOs.

Like a PEO, HROs allow you to add and remove HR services to your contract as you please. But like ASOs, they do not require you to form a co-employer relationship with the vendor.

Also, like ASOs, HROs tend to be less costly. This is because you only have to pay for the services you need.

At the same time, HROs do not sponsor insurance plans. That means they do not have the leverage to negotiate high-quality, low-cost policies as PEOs can.

Who Needs an HRO?

Large and enterprise businesses typically prefer HROs over ASOs and PEOs. Small to medium-sized businesses may prefer PEOs to HROs for insurance policy savings.

ASOs vs. PEOs

Aside from the size of your company, what other factors should you consider before selecting an ASO or PEO? There are four pretty significant differences between these two types of HR service providers.

Keep reading below to learn more about each.

PEOs Cost More

PEOs offer more services than ASOs, so they tend to cost more. The exact price you pay will depend on the vendor your choose.

Some PEOs collect per-employee benefits administration fees. Then, they might add on the cost to do payroll as a percentage of the total pay period amount.

Other PEOs require a monthly per-employee fee to manage your HR duties. This type of cost structure often comes with an initial setup fee, which can drive up the price.

ASOs use the latter model when determining costs. But their per-employee fee is typically much lower than a PEO’s per-employee fee.

For example, you may pay a few hundred dollars per employee per month to a PEO, whereas an ASO will charge a third to half that amount.

ASOs Offer Fewer Services

ASOs and PEOs tend to have similar HR services offerings. However, PEOs tend to provide a broader range of services compared to ASOs, which provide administrative services only.

PEO companies also allow for more service agreement customization. You can often employ the services of a PEO for only one aspect of your HR duties, then add on or take away services as your company grows or your needs change.

Also, PEOs offer one service that ASO companies never do: the co-employer relationship. The ability to take on payroll tax reporting and benefits sponsorship may be a dealmaker for many businesses.

Conversely, ASOs offer much fewer services. They do not provide co-employer agreements. And most ASO companies will not provide workers’ compensation insurance, though some do.

Now, keep in mind that an ASO’s HR offerings will still benefit employers. You just can not customize and add to your service agreement like you can with a PEO.

PEOs Absorb Risk

PEOs absorb some of a company’s risk by establishing the co-employer relationship. This relationship is often the primary reason a company will choose a PEO over an ASO.

However, keep in mind that PEOs do not absorb all of your HR risks. Instead, you and your PEO vendor will share that risk 50/50.

PEOs also offer added services like regulatory compliance and employee training. These services can help your company save money and reduce risk even further.

Unfortunately, ASOs do not offer co-employer agreements. They require you, the employer, to take on the risk of filing payroll taxes and sponsoring benefits plans.

Unless your company is a small business, though, the lack of co-employer agreements may not bother you. This is why, as we mentioned, PEOs are best for SMBs, while ASOs can work for larger companies.

ASOs Provide More Flexible Benefits

PEOs sponsor employee benefit plans. But that does not mean you get to choose whatever policies you please. You must be okay with using the PEO’s pre-chosen suite of benefits.

On the plus side, a PEO’s relationship with these benefits providers means you can get higher-quality plans at a lower cost than you could obtain on your own.

PEOs have many clients with hundreds of employees, meaning they have the leverage to negotiate deals you might not be able to.

On the downside, you will not have a choice if you do not like the benefits plans your PEO provides. ASOs solve this problem because they let you, the employer, choose the benefit plans you like.

Again, the downside to this ASO model is that the organization does not sponsor the plans. This reduces their leverage in the insurance marketplace, which could result in higher premiums for your employees. 

Major Disadvantages of the Co-Employer Agreement

As mentioned, one of the top reasons businesses choose PEOs over ASOs is for the co-employer relationship. There are many advantages to this type of agreement.

However, we also want to talk about some of the co-employment agreement’s downfalls. Here are three disadvantages you need to know about.

Higher Unemployment Tax Rates

Companies with extremely low employee turnover and low state unemployment tax rates would not benefit from a PEO’s co-employer agreement. PEOs typically have higher tax rates compared to these types of businesses.

The only exception to this is if you have experienced a high state unemployment tax rate in the past. This can occur due to high turnover at your company or the industry in which you reside.

In this case, the co-employer agreement may actually help you get a lower unemployment tax rate.

The Potential for Duplicated Payroll Taxes

Co-employer agreements take a lot of risk off your shoulders. However, there is one major risk PEOs put on your company: If you cancel your PEO service agreement before the year’s end, you will have to deal with duplicate payroll problems.

Your employees will receive two W2s: one from you, the employer, and one from your former PEO. Your HR people will have twice the work on their hands. And you will have to pay double employer taxes.

Some Insurance Carriers Will Not Work With Co-Employers

As we mentioned, PEOs can get some serious discounts on insurance policies. While this is great news for employers and their workers, insurance companies do not necessarily like giving out these types of discounts.

For that reason and others, many insurance providers refuse to work with co-employers like PEOs. For instance, Blue Cross Blue Shield will not insure PEO employees in some states.

Unfortunately, this fact can severely limit the plans available to PEOs. The choice of insurance carriers is limited to the providers your co-employer contracts with.

Outsource Your HR Services to National Workman’s Comp Solutions

An ASO can help businesses with administrative HR duties. On the other hand, a PEO offers a broader range of services.

However, you must sign a co-employer agreement to get the benefits of a PEO. And PEOs are not meant for businesses with more than a few dozen employees.

Are you searching for high-quality HR solutions for your business? At National Workman’s Comp Solutions, we don’t just sell workers’ compensation insurance.

We also offer ASO services, insurance brokerage services, and access to the best PEOs on the marketplace. Plus, our rates start as low as $32 per employee per month. Get a free instant quote now!

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