By Lyle DeWitt, CPA

As new business trends develop, CPA firms must keep pace in order to give clients ethical advice and responsible referrals. This article discusses the significance of integrated human resource service providers to your firm and your clients and offers practical advice on selecting a provider that you can trust, and that will profit your clients.

Here’s how it starts. A client asks for your advice, or perhaps even a referral, for a third-party payroll services provider. Before you drop the name of a well-known administrative services provider, consider for a moment the many advantages of an integrated human resources service provider. They are known as human resources outsourcers (HROs), or sometimes professional employer organizations (PEOs), but regardless of what you call them, you’ve probably considered calling one.

Why? More often than not, the answers will be more and less as in less liability, fewer fees, and fewer benefit hikes versus more choices, more available time, greater competitiveness, and greater overall value. The outsourcing boom that began over a decade ago has become increasingly more apparent—growing some 25 percent yearly—and desirable, especially with smaller companies that now can compete with large corporations in providing benefits options and containing costs.

More choices and lower costs
According to Mercer Consulting, healthcare costs are expected to increase 15 percent in 2004. To stay afloat, many companies are either slashing coverage options or passing increases on to their employees. Neither of these approaches supports a company’s goal of attracting and retaining qualified, high-performing personnel. To remain competitive, fiscally and otherwise, more and more companies are discovering an emerging solution, namely, outsourced benefits. Certain third-party providers can leverage their cumulative roster of participants in order to qualify for substantially lower rates. According to National Public Accountant (May 2003), “PEOs offer employees more and better benefits than they would receive from a small business…[and] due to economies of scale, can offer these benefits at attractive prices.” San Leandro-based TriNet Group, my employer, for example, recently announced it had contained healthcare rate hikes to 9.15 percent—easily half the national average—while adding to its coverage options.

Reducing risk, for you and your client
According to the Small Business Administration, business owners spend up to 25 percent of their time on employee-related paperwork. Additionally, smaller companies are less likely to have a dedicated human resources specialist. Now add in 401(k)s, the ADA, FLMA, and COBRA, and you may have the recipe for a compliance disaster. Of course, many payroll service companies claim they offer built-in compliance. But suppose your firm misses a deadline? Suppose an employee’s benefits are interrupted and a lawsuit ensues that targets both your firm and your client? One of the single greatest advantages of a PEO-style benefits provider is the limitation on liability; only a PEO will contractually assume most if not all liabilities related to the services they provide. Make sure they do.

Staying competitive applies to you, too
The advantages of contracting a third-party, integrated human resources services provider can go far beyond the time and money saved by automating payroll, leveraging group benefits, and handing off liabilities. Other returns can include increased satisfaction and retention, for both employees and employers—your customers.

“The only way you can attract and retain exceptional employees is to invest properly in your human capital,” Milan P. Yager, executive vice president of the National Association of Professional Employer Organizations, said recently. That means adding benefits and coverage options, not subtracting them. And the only way for many small and mid-size firms to do so, it would seem, is through a third-party provider. But not all providers provide equally.

Do your due diligence
Tremendous care must be taken to select a provider that is what it seems. The AICPA, CBA, Internal Revenue Service, and others offer some guidelines, but most address confidentiality and privacy laws. What to do?

Some resources to refer to include the National Association of Professional Employer Organizations (NAPEO) Web site as well as www.PEO-Directory.com. In the meantime, here are some suggestions to keep in mind:

• Get client and professional references. Dig deep. Check with the HRO’s essential vendors. For example, confirm insurance coverage, and ask whether the policy is new or has been renewed. Ask the HRO for references from inside its carriers, and find out how its insurance carriers are rated by A.M. Best or other insurance rating organizations. Also, ask for customer references, from both current customers and those who terminated their service, and find out why former customers terminated their service. A Google search on the HRO will tell you about anything negative (past fines, pending litigation, and the like).

• Check to see whether the HRO is a member of the NAPEO and is accredited by the Employer Services Assurance Corporation (ESAC).

• Check on the provider’s financial standing (bank and credit references).

• Understand how the employee benefits are funded and insured. If a workers’ compensation or other benefit plan is underfunded or not fully insured, the entire cost of a claim may fall on you or your client, not the PEO. Get a guarantee of the various plans’ funding in writing and ask for back-up documentation.

• Make sure the employee risk pool matches your client’s profile. A PEO with a homogeneous customer base won’t put your firm or your client’s at risk by pitting it against other businesses with higher benefits usage or medical claims costs, sending rates skyrocketing later. Compare the HRO’s average salary base and overall occupational makeup to that of your or your client’s firm. Are they close? A low-risk customer in a largely high-risk PEO environment may not get the benefits or services that they expect.
  

• Confirm that participating employees will receive first-day coverage. Good PEOs offer this. A waiting period for employee benefits weakens a firm’s recruiting position during competitive hiring cycles. Also, make sure there is no exclusionary language pertaining to preexisting conditions or any need for individual underwriting. If assumed coverage is not provided, your firm or your client may be caught in an embarrassing—and potentially costly—situation. Remember the two phrases guaranteed issue and you get what you pay for.
  

• Find out whether compliance liabilities can be assumed contractually in your state. A careful reading of the PEO’s contract is mandatory. Understand exactly which risks are and are not transferred or shared. Some risks can be completely transferred over to the PEO, including payroll timeliness and accuracy; employment taxes, filings, and compliance; health plan compliance and filings; health plan remittances; HIPAA compliance; and COBRA compliance. For those, the PEO can and should hold the customer harmless. Only other risks, such as human resources and employment litigation risks, can be shared—and the contract should make this clear. The courts and administrative agencies have established some clear guidelines about risk transfer.

Parting wisdom and caveats
Since it will be your counsel and advice that will help your client realize the advantages of an integrated human resources provider, your own stock should rise appreciably—if everything goes as planned. Of course, the reverse is just as true. Remember to demonstrate great care and diligence in reviewing and referring any third-party provider, particularly in the area of human resources.

Lyle DeWitt, CPA , is vice president of Finance and Operations for The TriNet Group, Inc. (http://www.trinet.com), a nationwide HR consulting firm and services provider. Before that, he was in public accounting at Armanino, McKenna, LLP. He can be reached at lyle.dewitt@trinet.com.