Topic Outsourcing HR / PEO

When is the Best Time to Transition PEOs?

When is the Best Time to Transition PEOs?

January 1st is the ideal time for companies to switch professional employer organizations (PEOs). As the calendar resets each year, transitioning between PEOs at the start of January minimizes complications and disruptions to critical programs.  

With careful coordination, companies can ensure a smooth changeover of payroll, benefits, healthcare, taxes, reporting, and other critical services when partnering with a new PEO. Making a switch at the beginning of the year provides consistency and sets up the new relationship for success. 

Before exploring the specifics of why January 1st is the optimal transition date, it helps to understand some of the reasons companies may look to change PEOs in the first place. 

Why should you consider transitioning PEOs? 

There are several common reasons an organization may look to switch professional employer organizations: 

  • Lack of Certification: Only a fraction of the 487 PEOs have been certified by the IRS. This comes with advantages such as eliminating the federal wage base restart when transitioning to a new PEO. 
  • Desire More Customized Benefits: As companies grow, they often want to tailor benefits to their workforce and culture instead of the standardized packages offered by many PEOs. 
  • Seeking Better Service: Some companies feel their current PEO lacks responsiveness or proactive support and want to partner with one that provides better day-to-day service. 
  • Changing Business Needs: The services and support a business needed from a PEO when they first partnered may not meet their needs as the company scales or goes through organizational shifts. 
  • Cost Concerns: PEO fees often rise proportionally as employee headcount grows. The increasing costs over time can motivate companies to explore more budget-friendly PEO options. 
  • HR Compliance Worries: There may be concerns over the current PEO's ability to keep the organization updated on changing regulations or worries about compliance gaps. 

With these motivations in mind, most companies find January 1st is the ideal time to initiate a transition between PEOs. Here's a closer look at why the start of the calendar year makes switching more seamless: 

Why should you switch PEOs on January 1st? 

By aligning the transition with the calendar year, companies can minimize disruptions and complications such as: 

  • Avoid Resetting Medical Deductibles: Employee medical insurance deductibles reset every January 1st when the new plan year starts. A mid-year transition between PEOs would likely cause deductibles to reset again, creating an unnecessary financial burden for employees. 
  • Prevent Payroll Tax Complications: Switching payroll administration and tax payments mid-year can potentially disrupt already-paid taxes and require repayment under the new PEO. There would also be a restart of federal and state wage bases that determine tax rates. However, transitioning payroll on January 1st allows full-year consistency without complications or wage base restarts. One exception - if switching from a non-certified PEO to a certified PEO (CPEO) mid-year, there would be no federal wage base restart. 
  • Get One W-2 from the New PEO: When companies change PEOs mid-year, employees end up with multiple W-2s that require extra paperwork and tax reconciliation. A January 1st transition results in just one W-2 from the new PEO for the full tax year. 
  • Maintain Unemployment Insurance Tax Rate: A company's federal and state unemployment insurance tax rates are based on history. Switching PEOs mid-year could reset this rate and increase costs. Keeping the transition focused on January 1st helps maintain the established rate for the entire calendar year. 
  • Align with Health Insurance Open Enrollment: Since open enrollment typically takes place in November/December for a January 1st effective date, transitioning PEOs on January 1st seamlessly coordinates with this process, preventing gaps in health coverage. 
  • Sync with Business Planning Cycles: Most companies plan their budgets and finances around the calendar year. Switching PEOs on January 1st ensures the transition aligns cleanly with business planning cycles already in motion for the new year. 
  • Minimize Service Gaps: Careful coordination can prevent gaps in payroll, benefits, or other services during a PEO transition. With proper planning, a January 1st switch reduces this risk and disruption. 

The start of a new year provides the best opportunity to initiate a PEO switch while minimizing disruptions related to payroll, taxes, benefits and more. However, there are additional important considerations when undertaking this transition. 

How do you exit a PEO relationship? 

Once the decision has been made to switch PEO partners and January 1st has been identified as the ideal transition date, several necessary steps are involved in successfully moving from one PEO to another. 

First, review the current PEO agreement for any termination clauses and ensure proper notice is provided based on the outlined terms. Many PEO contracts require 30-60 days advance written notice to terminate the partnership. 

Next, work closely with the new PEO to coordinate the transition plan and implementation schedule. This should outline critical milestones such as transferring payroll administration, changes to HRIS systems, benefit plan transitions, and more. Communication is vital to prevent any gaps in service during the switch. 

Carefully determine which services will remain outsourced with the new PEO and which (if any) will be brought in-house or handled by other vendors. This may require researching payroll providers, benefits administrators, integrated HR software, and other solutions. 

Data migration is another essential component. Work with the current PEO to obtain all necessary employee data, payroll records, tax filings, and HR documentation well in advance of the termination date. The new PEO can then integrate this data into their systems and processes. 

Lastly, keep employees informed with clear communication about the upcoming change in PEO partners. Be transparent about potential impacts on pay cycles, benefit plans, points of HR contact, and more. Listen to any concerns and answer all questions. 

While complex, a well-planned PEO transition sets up the new partnership for success and continuity as the calendar flips to January 1st. Lean on experts like transition consultants and the new PEO to guide a smooth transfer. 

PEO Transitions Don’t Have to Be Stressful 

Switching professional employer organizations can be complex, but starting a new calendar year provides an optimal transition point that minimizes disruptions. By coordinating an effective PEO transition, companies can maintain continuity in vital programs like payroll, taxes, benefits, time off, and reporting while also aligning with open enrollment periods and financial planning cycles already underway for the new year. 

Careful planning is critical when embarking on this transition, and organizations should ensure they review PEO contracts, map out implementation timelines, transfer data, communicate with employees, and leverage partners like the new PEO.  

While challenging, a well-executed transition sets the stage for a lasting and productive PEO partnership.  

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