What Is a PEO Health Plan? Benefits of PEO Health Insurance for SMBs

If you have a small or medium-sized business, you’ve most likely felt the squeeze of increasing health insurance premiums. Quotes are high, forms are piling up, and all of a sudden, providing good benefits doesn’t feel like a benefit at all, but a cost.

You’re not alone. Across Connecticut and nationwide, small business owners are struggling with the same challenge. Health insurance costs have climbed so steeply that nearly all small employers worry about whether they can keep offering coverage at all in the years ahead.

That’s where PEO health insurance comes in. By partnering with a Professional Employer Organization, companies can get bigger group plans at smaller prices—while dumping much of the benefits administration headache. Let’s dissect how it works, what the actual benefits (and tradeoffs) are, and whether it’s the right step for your business.

What is PEO health insurance?

A PEO health insurance plan is a group health plan provided by a Professional Employer Organization. When you become a client of a PEO, you are in a co-employment arrangement: the PEO acts as the employer of record for some administrative functions, and your employees are eligible for the PEO’s group benefit plans. Since the PEO has many companies under its umbrella, it negotiates superior rates and plans that a stand-alone small employer cannot obtain.

Why business owners choose a PEO medical insurance plan

Here are the reasons owners tell me they look into a PEO medical insurance option:

• Buying power. PEOs combine employees from numerous client companies, which achieves scale. The bigger the group, the more insurers perceive risk differently, and premiums can be reduced.
• Less admin. The PEO manages enrollment, COBRA, claims inquiries, and paperwork that brings so much consternation. That leaves your staff to work on business, not benefits forms.
• Better benefits menu. Small businesses often can’t afford solid plans. With a PEO insurance plan, your staff can have access to the type of medical, dental, vision, and retirement choices enjoyed by bigger companies.
• Compliance support. PEOs usually handle benefits compliance between states — beneficial if you employ remote staff across state borders.

These benefits account for why increasingly more businesses are opting for PEO alliances: industry statistics reveal hundreds of thousands of companies utilize PEO services, and millions of employees are covered by PEO agreements.

The Economics Behind PEO Medical Insurance

According to the Kaiser Family Foundation, the average health insurance cost in 2023 was $8,435 for single coverage and $23,968 for family coverage. But here’s the kicker: small businesses actually pay more. Companies with fewer employees typically see premiums of $8,722 for single coverage.

Why? Risk pooling. Insurance companies prefer predictable risk, and a firm with 15 employees is a far greater risk than a pool of 15,000 employees. If one of your 15 employees becomes seriously ill, that’s a huge drag on your group’s claims experience and future costs. But if a single person in a pool of 15,000 becomes ill, that is hardly perceptible.

JPMorgan Chase determined that companies with under $600,000 a year in revenue have a median payroll cost for health insurance of nearly 12%. That’s about one dollar out of every eight you pay in wages directly to the cost of health insurance. PEO insurance policies rectify this situation by pooling enormous risk pools.

How a PEO health plan actually works (step-by-step)

1. You sign a client service agreement. That contract spells out which HR tasks the PEO will manage and which you’ll keep.
2. Co-employment is established for administrative purposes. The PEO is the employer on payroll tax returns and benefit plans, yet you retain control of day-to-day supervision and operation.
3. Employees are enrolled in the PEO’s master or multi-employer plan. Rates are negotiated at the PEO level. Your people get access to the plan(s) the PEO offers.
4. The PEO runs benefits administration. Enrollment, billing reconciliation, employee questions, and regulatory reporting are handled through the PEO’s systems.
5. You monitor usage and performance. You should review utilization reports and cost trends regularly to confirm that the arrangement delivers value.

What are the downsides or red flags to watch for?

• Limited plan choice. Some PEOs offer a small set of master plans. If your workforce has unique needs, that could be limiting.
• Co-employment consequences. Co-employment affects tax filings, workers’ compensation, and how benefits show up on payroll. Understand the legal and tax implications.
• Switching friction. Terminating a PEO relationship can be operationally messy; review exit terms and transition support carefully.
• One-size-fits-all pricing traps. Some PEOs use percentage-of-payroll pricing that can be expensive once you layer in fees. Ask for transparent, itemized pricing.

How to evaluate whether a PEO health plan is right for your company

Here’s a simple checklist I use with business owners:

1. Get apples-to-apples quotes. Ask the PEO to show the plan design and total employer cost versus your current plan.
2. Ask about member experience. Request demo access to the employee portal and a sample benefits communication packet.
3. Check carrier partners. Which insurance carriers does the PEO work with in your state? Are those carriers in-network for your employees?
4. Examine the cost model. Does pricing include workers’ compensation and payroll taxes, or are those billed separately?
5. Review service levels. Ask for SLAs on enrollment turnarounds, claims support, and compliance filings.
6. Ask about exit and data portability. What happens to employees, COBRA, and claims records if you leave the PEO?
7. Get client references. Talk to current customers in your industry and of comparable size.

The Connecticut Advantage: Local Expertise Matters

National PEOs may provide broad networks and competitive pricing, but there is tremendous value in having a PEO that knows your local market. Connecticut has unique regulations and market factors affecting the way health insurance operates within the state.

OEM America has assisted Connecticut companies with these intricacies for more than 25 years. A locally-based PEO, they recognize the unique challenges of Hartford, New Haven, Fairfield County, and the rest of the state.

Working with a local PEO such as OEM America means direct access to seasoned professionals who will outline your choices for you without bombarding you with corporate doublespeak. They are familiar with which health plans suit Connecticut employees best and can assist you in making decisions.

Beyond Health Insurance: The Complete Benefits Package

Most PEOs don’t leave things to health insurance. They usually provide full-coverage benefits packages that may include dental and vision coverage, employer-matched retirement plans, flexible spending accounts, health savings accounts, life insurance, and disability coverage.

Some PEOs also provide access to employee assistance programs, wellness programs, and benefits like discounts on gym memberships or financial planning. These value-added benefits enable you to build a competitive total compensation package that attracts and retains skilled employees.

Have OEM America Help You Find the Right Health Plan

Look for PEO partners who take time to understand your specific business needs rather than offering one-size-fits-all solutions. Ask detailed questions about their health plan options, pricing structure, and service model. Most importantly, choose a PEO with a track record of success and strong client retention.

OEM America provides complimentary consultation to assist Connecticut business owners in learning their options and deciding if a PEO arrangement is right for them. With more than 25 years of experience assisting local businesses in addressing their HR and benefits concerns, they can give the individualized advice you need to make an educated decision.