PEO Glossary

In a PEO arrangement, 401(k) retirement plans are administered through a Multiple Employer Plan (MEP). A 401(k) MEP allows multiple businesses under the PEO umbrella to participate in a single retirement plan, which dramatically reduces administrative costs, fiduciary responsibility, and plan management burdens for each participating employer.

This gives small and mid-sized businesses access to retirement plan quality and pricing that rivals large corporations — without the complexity or cost of sponsoring a standalone plan.

ASO is an HR outsourcing model where a company retains full employment liability but outsources specific HR administrative functions — such as payroll processing, benefits administration, and compliance reporting — to a third-party provider.

Unlike a PEO, there is no co-employment relationship in an ASO arrangement. The business remains the sole legal employer. ASO is often preferred by larger organizations that want administrative support while maintaining direct employer control over their workforce.

Co-employment is the legal structure at the heart of a PEO relationship. The PEO serves as the employer of record for tax and benefits purposes, while the client business retains complete control over day-to-day operations, hiring decisions, and employee work direction.

Both parties share employer responsibilities: the PEO handles payroll taxes, HR compliance, and benefits administration; the client manages operations, culture, and performance. This shared arrangement reduces employer risk and unlocks group purchasing power for enterprise-level benefits.

An Employer of Record (EOR) is an entity that officially hires employees on behalf of another company, handling all employment obligations — including payroll processing, tax withholding, benefits administration, and legal compliance.

EORs are especially valuable for companies hiring across multiple states or internationally, where local labor laws and tax regulations vary significantly. Unlike a PEO, an EOR typically takes on full employer liability without requiring a co-employment agreement, making it a faster path for entering new markets.

EPLI protects businesses from financial losses arising from employment-related claims such as wrongful termination, workplace discrimination, sexual harassment, retaliation, and failure to promote.

Many PEOs include EPLI coverage as part of their service package, providing client businesses with a critical layer of protection against costly HR-related lawsuits. EPLI is especially important for growing businesses that may not yet have fully documented HR policies in place.

A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to set aside pre-tax dollars to pay for eligible medical, dental, and vision expenses. FSAs reduce taxable income for both the employee and the employer (FICA savings).

FSAs typically follow a "use-it-or-lose-it" rule, meaning unused funds may be forfeited at the end of the plan year, though some plans allow a small rollover or a grace period extension. PEOs commonly administer FSAs as part of a comprehensive benefits package.

GAP insurance is an add-on health benefit that covers out-of-pocket costs — like deductibles and co-insurance — that employees would otherwise pay entirely on their own following a medical event.

When paired with high-deductible health plans (HDHPs) or high-deductible copay plans, GAP coverage significantly reduces employees' financial exposure. PEOs often offer GAP plans as a cost-effective way to enhance the perceived value of benefits without dramatically raising premiums, helping employers stay competitive in hiring.

Companies working with a PEO can reduce health insurance premiums through four core strategies:

1. PEO Buying Power — PEOs aggregate employees from hundreds of businesses, gaining negotiating leverage with carriers typically reserved for large corporations.

2. Level-Funded Plans — A hybrid between fully-insured and self-funded plans that may return surplus premiums when claims come in below projections.

3. Pharmacy Carve-Outs — Separating pharmacy benefits to negotiate drug pricing independently, often yielding significant savings.

4. Plan Design Strategies — Adjusting deductibles, network types, and plan tiers based on workforce demographics to optimize cost and coverage balance.

An HRA is an employer-funded account that reimburses employees tax-free for qualified medical expenses. Unlike an HSA, only the employer contributes — employees cannot make personal contributions to an HRA.

The employer sets the annual allowance and eligible expense categories. Common types include the QSEHRA (Qualified Small Employer HRA) for small businesses and the ICHRA (Individual Coverage HRA), both increasingly offered through PEO benefit packages.

PEOs help businesses stay compliant with a constantly evolving landscape of federal, state, and local labor laws — including the Fair Labor Standards Act (FLSA), Family and Medical Leave Act (FMLA), Americans with Disabilities Act (ADA), OSHA regulations, and Equal Employment Opportunity (EEO) requirements.

PEOs provide compliant employee handbooks, offer letter templates, termination procedures, and leave management policies. By taking on much of this compliance burden, PEOs significantly reduce the risk of costly penalties, lawsuits, and regulatory audits for their client businesses.

Most PEOs include a built-in HRIS platform as part of their service package — a centralized, cloud-based portal that connects all HR functions in one integrated system.

Typical HRIS features include employee onboarding and offboarding workflows, time and attendance tracking, benefits enrollment, payroll processing, performance management, document storage, and HR reporting and analytics. An integrated HRIS eliminates the need for separate software subscriptions and reduces manual data entry errors across the organization.

An HSA is a triple-tax-advantaged savings account available to employees enrolled in a qualified High-Deductible Health Plan (HDHP). Contributions are tax-deductible, investment growth is tax-free, and withdrawals for qualified medical expenses are also tax-free.

Both employers and employees can contribute to an HSA. Unused funds roll over year to year with no expiration, making HSAs an excellent long-term healthcare savings tool. HSAs are frequently paired with HDHPs offered through PEO health plans as a cost-effective benefits strategy.

Level-funded insurance is a hybrid plan model that combines elements of both fully-insured and self-funded health plans. Employers pay a fixed monthly premium — the "level" amount — that covers expected claims, stop-loss insurance, and administrative fees.

If actual claims come in below projections at year-end, the employer may receive a surplus refund. Key benefits include predictable monthly costs, claims data transparency, surplus refunds in low-claims years, and the ability to customize plan design based on workforce health trends. PEOs frequently offer level-funded options to mid-sized businesses seeking more control over their health spend.

When businesses hire employees in multiple states, they must comply with each state's unique labor laws, tax filings, unemployment insurance requirements, paid leave mandates, and employment regulations — which can quickly become overwhelming without dedicated HR expertise.

A PEO manages this complexity by registering in all applicable states, handling state payroll tax filings and unemployment insurance (SUTA), keeping pace with state-specific paid family leave, minimum wage, and overtime laws, and maintaining compliant offer letters and employment policies for each jurisdiction.

In a PEO co-employment arrangement, the PEO acts as the employer of record for payroll tax purposes. This means the PEO calculates, withholds, and remits all federal, state, and local payroll taxes on behalf of employees — including Social Security and Medicare (FICA), Federal Unemployment Tax (FUTA), and State Unemployment Tax (SUTA).

The PEO also files all required federal and state tax forms, including W-2s and quarterly 941s. This eliminates payroll tax filing risk for client businesses and ensures employees are always paid accurately, correctly taxed, and on time.

A PEO provides outsourced HR services through a co-employment model, managing payroll, benefits, compliance, and workers' compensation on behalf of client businesses.

By joining a PEO, small and mid-sized businesses gain access to Fortune 500-level benefits, reduced employer liability, and a complete HR infrastructure — without the overhead of building one in-house. According to NAPEO, businesses that use a PEO grow 7–9% faster, have 10–14% lower employee turnover, and are 50% less likely to go out of business.

A PEO broker is an independent advisor who works on behalf of a business to compare, evaluate, and recommend multiple PEO providers. Rather than representing a single PEO, a broker analyzes the market across pricing structures, benefits packages, HRIS technology, industry specialization, and service quality to find the optimal fit for a company's size and needs.

PEO brokers are typically compensated by the PEO (not the client), making their advisory services completely free for the businesses they serve — similar to how insurance brokers are paid. Using a PEO broker saves significant time and helps avoid costly mismatches between a company's needs and a PEO's actual capabilities.

PEOs are a powerful growth enabler for scaling companies. As a business adds headcount, a PEO provides the HR infrastructure needed to support rapid expansion — including onboarding workflows, compliant employment documentation, payroll scaling, and multi-state compliance — without requiring additional HR hires.

PEOs also help growing companies attract top talent by offering competitive benefits packages that would otherwise be unaffordable at their size. By offloading HR administration, leadership teams stay focused on revenue-generating activities rather than people operations and compliance overhead.

A TPA manages the administrative functions of self-funded or level-funded health plans on behalf of an employer. While a TPA does not assume financial risk for claims — that responsibility remains with the employer — they provide the full operational infrastructure to run a health plan efficiently.

TPA responsibilities include claims adjudication and payment processing, reporting and claims data analytics, provider network management, COBRA administration, and ensuring compliance with ACA and ERISA requirements. PEOs often partner with or serve as a TPA for their level-funded health plan offerings.

PEOs provide workers' compensation coverage through a master policy that covers all client employees under the PEO umbrella. This delivers several major advantages over standalone policies:

Lower Rates — PEOs negotiate significantly better workers' comp rates due to the combined size of their client workforce.

No Large Upfront Deposits — Businesses avoid the large annual premium deposits required for standalone policies.

Pay-As-You-Go Billing — Premiums are calculated based on actual payroll each pay cycle, improving cash flow predictability.

Audit Elimination — Most PEOs handle year-end audits internally, removing a major administrative burden from the client.

Claims Management — PEOs assist with claims processing and return-to-work programs to minimize costs and downtime.