Unemployment, Workers Compensation and Medical Insurance Costs

Updated: October 25, 2010

Unemployment Compensation

PEO's have been hit hard with increased unemployment tax rates all over the country. For example, in Florida most PEO's are being charged the maximum or very close to the maximum rate in Florida which currently is 5.4% of the first $7,000 of income for each employee. Florida employers who exit from a PEO after being in the relationship for two years or more will be rated at the same rate as a new business which is 2.7%, thereby saving up to 50% on their unemployment tax rate.

If your organization was stable during the economic downturn with few or no downsizing, you are now paying higher taxes than you should because you are mixed into the entire PEO pool. On the other hand, if your organization was forced to cut employees in the last two years, then you could take advantage of lowering your employment taxes by going back to being an independent company.

Before jumping off the PEO be sure you know your state laws regarding collection of unemployment taxes. Florida, and most other states, uses a calendar year in computing unemployment taxes. If an employer exits from a PEO in mid-year, the employer may be taxed twice for unemployment for the same employees. FICA taxes are also computed on a calendar year basis and could increase the employer's liability for Social Security and Medicare payments. Therefore, it would be best to wait until a January 1 to make a change.

Workers Compensation

In Florida, employers can qualify for a 7% discount on their workers compensation premiums by implementing a Drug Free Workplace and a safety program. Additionally, if the company has an exceptionally good year with few or no accidents, the organization may qualify for a premium distribution. A premium distribution is a type of rebate for having a good safety record and can be used to reduce future workers compensation premiums. These discounts and premium distribution plans are not typically offered by a PEO.

Modification rates or mod rates are determined based upon a long history of the cost of accidents in various workers compensation codes. For example, a code of 8810 is given to employees who work inside an office. In Florida the base workers compensation rate is 0.24%. In other words, you pay 24 cents in workers compensation premiums for each $100 in wages paid to an employee with this workers compensation code. For a carpenter the base rate is 10.27%. These rates are based upon a 1.0 mod rate. The mod rates of a particular organization may go up or down depending upon the safety record of the employer. If the company has a good safety record, it not only can receive the premium distribution noted above, but may also be eligible for a lower mod rate. An example would be a company that has a good safety record and may have a mod rate of 0.75. The mod rate is multiplied by the base rate to arrive a a premium rate. In the example of a carpenter, the workers compensation premium would be .75 times 10.27 or 7.70%. Having lower mod rates can result in significant savings.

A bad safety record will raise the mod rate accordingly forcing the employer to pay a higher than average premiums. Most PEO's charge their clients a mod rate of 1.0.

Pay as your go programs in which the employer pays the workers compensation premiums on each payroll used to give PEO's an advantage. In the past couple of years, these types of programs are now common place. The advantage of a pay as you go program is that it virtually eliminates the necessity for a workers compensation audit. Under the traditional workers compensation, the amount of the premium was based on the number of employees in each code and their estimated earnings. At the end of the year, the workers compensation carrier would conduct an audit. If the employer had a good year and hired additional employees, they were often surprised a big premium adjustment. This problem has virtually disappeared with the pay as you go programs.

Medical Insurance

The primary reason the employee leasing business was formed was to enter into a co-employment relationship with the client company in which the leasing company would become the employer of record for medical insurance and other group benefits reasons. The idea was that the employee leasing company would have thousands of employees on their payroll and use this power of numbers to negotiate better rates with insurance carriers.

In most cases, this advantage has gone away as more and more companies in an employee leasing arrangement are carving out their medical benefits because the premiums offered by the PEO exceeded those that the company could get on the open market.

There are two issues here. The first is that if you are still getting your medical insurance through your PEO, you owe it to yourself to get quotes from other sources to see if the premiums you are being charged are still competitive. The second issue is the PEO charges administrative fees. In the past, an employer received such good rates on their medical insurance that they more than offset the cost of administration fees. This may longer be the case.

The bottom line is that if you have carved out your benefits with a PEO, there is more than likely no reason for your company to be in employee leasing.

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