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7 min read

What is PEO Insurance? A Guide to Co-Employment Health Plans

What is PEO Insurance

Article roundup

  • Professional Employer Organizations (PEOs) handle a number of HR tasks for clients, including the administration of employee benefits such as health insurance, vision and dental plans, and retirement accounts.
  • PEO insurance plans can offer many benefits for small businesses, such as reduced premiums and greater benefits. They also reduce the workload on HR departments.
  • PEO insurance plans work by scaling a large number of employees, giving them a greater risk pool, and the power to negotiate better packages than those typically offered to small businesses.
  • PEO insurance is tied to the PEO contract, and it is limited to the provider offered by the PEO. Because of this, it is important for businesses to choose the best PEO partner for their needs.
  • The Affordable Care Act (ACA) has resulted in higher premiums for many small business plans, which can be mitigated by using a PEO health insurance plan.

A PEO is a “Professional Employer Organization”. PEOs work with a client business to handle a number of routine Human Resources (HR) tasks including employee tax reporting and payment, onboarding new employees, and benefits administration. By taking on these tasks the PEO reduces the strain on a company’s internal HR department. The company, in turn, pays the PEO a monthly fee, often calculated as a percent of gross payroll. PEOs do not interfere in management, sales, marketing, or other business functions outside of their scope.

PEOs are not just outsourced administrators, however. PEOs and their clients work under a co-employer agreement; the PEO is the “employer of record” for tax and benefits administration purposes. The client company is known as the “worksite employer”. 

It is the PEO, not the worksite employer, who works directly with insurers, though the client may have a choice of packages offered by the PEOs insurance partners. All of the co-employees working under the companies contracted by the PEO give it the benefits of scale when negotiating with insurers. This is what allows a relatively small company to have access to insurance premiums and packages normally only offered to larger organizations.

The cost savings for business in using a PEO for health insurance can be significant: For example, one business (with 100 employees) reported health insurance premiums of $45,000 per month without a PEO, compared to premiums of $32,000 per month when using a PEO: A saving of $156,000 in total payroll expenses for that company. 

There can be many benefits to using a PEO for employee health insurance. There are also some risks, and not all PEO health insurance packages will work for all businesses. Here, we look into the topics of PEO health insurance, and other insurances, in detail. 

What is PEO insurance?

PEO insurance is the health, vision, dental, unemployment, and other insurance packages that a PEO provides to its co-employees. When a company contracts with a PEO, all employee insurance plans will be switched over to those provided by the PEO. These may be with the same insurer used previously, but more often they will be through a different provider. While these plans are offered through and administered by the PEO as employer of record, they are still contingent upon employment with the client business, the workforce employer.

Different PEOs will often work with different insurers, who may cater to specific needs. Furthermore, PEOs will have insurance options and add ons so it is important to be upfront about your needs and budget when discussing insurance plans with a potential PEO partner.

What are the benefits of co-employment health plans?

Small and medium businesses can be at a disadvantage compared to larger companies when it comes to negotiating employee health plans and other benefits packages. Companies with few employees generally pay high premiums, and if there are a number of insurance claims during a period, those premiums can rise at the next renewal.

PEO health insurance plans, however, are similar to those offered to large companies. Premiums are usually lower, there may be packages available offering greater coverage, and premiums will be more stable. This can aid in attracting and retaining new employees, and reducing yearly expenses.

Using a co-employment health plan will also make handling insurance options and administration easier for company owners and HR departments. Once a good PEO is chosen, owners have a partner they can rely on to explain and help navigate their insurance plan, without having to research the complex insurance market themselves. HR departments will work directly with the PEO to file claims or answer employees’ questions about insurance. They will have an expert partner on hand and will not have to become experts themselves.

How does the Affordable Care Act (ACA) impact co-employment health plans?

The Affordable Care Act requires companies with over 50 employees to provide health insurance plans for their employees. In addition, since the passage of the ACA, health insurance premiums have risen. This has increased costs for small businesses, which in turn has made co-employment health plans become more and more popular alternatives.

PEO insurance is better equipped to meet ACA requirements than small businesses are alone because the PEO has a much larger number of total employees, and can negotiate a better deal with the insurers. PEO health insurance premiums are also less likely to increase as a result of ACA requirements than plans offered by insurers directly to small businesses.

How can a PEO help your business save money on healthcare costs?

PEOs work by consolidating HR services and insurance packages for many companies together, under the administration of the PEO. Each client company no longer has to have staff dedicated to payroll administration, employee tax reporting, job posting and onboarding new staff, benefits administration, and ensuring regulatory compliance. Because these are relatively routine administrative tasks, the PEO is able to use economies of scale to efficiently outsource these tasks.

PEO insurance plans work well because of risk pooling. A health insurance risk pool is when a large group of employees is brought to an insurer from a single company, in this case, they are the total number of co-employees working under the PEO. Health insurance premiums are calculated to reflect the expected health care costs of a given risk pool, plus the expenses, profit, and taxes of the insurance company itself.  The insurance company calculates the average healthcare costs of the entire group, with healthier, lower-cost individuals offsetting the costs of individuals with higher risk factors. The larger the risk pool, the more stable pricing can be. Because PEOs represent many more employees than any of their clients can bring to an insurer alone, they are able to obtain lower-priced or higher-tier health coverage.

The same economy of scale that allows a PEO to efficiently consolidate HR tasks allows it to access lower premiums for insurance packages. Having such a large risk pool mitigates the risk for the insurance company, which means that they can offer lower premiums to a PEO than they would be able to offer a single client of the PEO.

How do you decide if a co-employment health plan is right for your company?

Unlike insurance brokers, PEOs are not able to choose from every insurance plan on the market. PEO health insurance plans are limited to those offered by the insurer or insurers that the PEO works with. In order to decide if a co-employment health plan is right for your company, you’ll first need to decide which PEO is right for your company.

Today there are hundreds of PEOs specializing in specific regions and industries; research potential co-employment partners that match your business profile. Other business owners with similar insurance requirements may be able to recommend a good option. If your business has very specific insurance needs or you prefer to stay with the same insurance provider but want to switch to PEO insurance for lower premiums or better coverage, you may want to work with a PEO broker to find the right fit.

Then, compare the PEO insurance packages offered with those your company currently uses. The insurance and benefits plans may be compared “apples to apples”, but keep in mind the potential savings on reduced HR work and the monthly PEO fees when deciding if a co-employment health plan is the right way to go.

How much will it cost to enroll in a PEO insurance program?

The cost of enrolling in a PEO insurance program will vary depending on what other services your company has signed up for. Costs will also vary between different PEOs, but they will generally fall between $50-$200 per co-employee.

In addition to this, PEOs charge for HR administration services. These could be limited to employee benefits and tax administration, but they could also include onboarding, offboarding, training, recruitment, and more. Total charges will depend on the number of services contracted.

PEO fees can be calculated as a percent of gross monthly payroll, a set fee for the entire company, or as a monthly fee per co-employee. Totals costs (not including insurance premiums) usually fall from 2-15% of gross monthly payroll.

What are the risks of PEO insurance, and how can these be mitigated?

While a PEO health insurance plan may be lower cost, give more benefits, and have more stable premiums than a small business health plan, there can be risks involved. If the business decides to quit working with the PEO, it will need to find a new insurer or pay higher premiums with the same insurer. Since co-employees work for the PEO for administrative purposes, they will no longer be employed by the PEO when the contract is canceled, and thus no longer eligible for the PEO health insurance package. To mitigate this risk, company owners must be sure they have chosen a PEO that they will be comfortable working with for the long term.

A risk for a quickly growing company with a large workforce is that they may grow large enough that they are able to negotiate similar insurance premiums on their own, and will see relatively fewer savings by using PEO insurance

Video Explainer: Health Insurance — Use a PEO or a Broker?

Here, Group Management Services looks at the pros and cons of choosing a PEO or a broker for employee health insurance coverage. 

PEO Insurance — choose carefully

PEO insurance can allow a quickly growing small company to offer competitive benefits packages on par with those of a larger corporation. Premiums will also tend to be lower and more stable, and the PEO is able to take over the work of administering the plan. This can have a positive effect on the bottom line for the company, giving them more resources to focus on its core business goals.

PEO insurance is, however, contingent upon the PEO contract. Before jumping in, be sure to choose a PEO with insurance plans and pricing that will work with both your short and long term goals.


Insurance plan administration is one of the many services offered by most PEOs. The PEO itself is generally not the insurer; rather it works with one or more insurers to provide packages for co-employees working within the various companies contracted by the PEO. As the employer of record, the PEO represents all co-employees and administers their plan with the insurer.

A co-employment health plan is similar to any other health plan, and may even come from the same insurer that a company worked with prior to contracting with a PEO. The premiums paid and coverage offered, however, will be more similar to those offered to large companies, rather than small or medium businesses.

Travis is a global business development advisor. He has spent the last 14 years supporting business establishment and development in North America, Southeast Asia, and throughout the world. With multiple degrees from the University of Oregon, Travis currently splits his time between the US, and Bali, Indonesia. At RemotePad, Travis writes about remote work, hiring internationally and PEO/EOR business models.