Using a PEO Just for Health Insurance: Is It Worth It for Your Small Business?

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The honest answer is—if you’re a small business owner trying to navigate the tangled web of health insurance options, the idea of using a PEO (Professional Employer Organization) just for health insurance sounds like a dream come true. You get access to group plans that supposedly come with better rates and benefits, all without the headache of managing insurance yourself. So, what’s the catch? Is a PEO an insurance company, or just a middleman? And, importantly, is it actually worth the cost you’ll be paying? Let’s dive in.

What Does It Even Mean to Use a PEO "Just" for Health Insurance?

PEOs are firms that employers partner with to outsource HR functions, including payroll, benefits, and compliance. They technically become the employer of record for your staff. But many small businesses don’t want the full package of HR outsourcing – they want the group health insurance benefits without signing up for the whole shebang. Enter “PEO for benefits only” or “a la carte PEO services.”

Here’s the tricky part: PEOs are not insurance companies. They negotiate and administer group health plans, bundling your business with others to get leverage. Think of it like a carpool. The PEO arranges the ride for a group of businesses, but the insurance company itself still designs and prices the plan.

Comparing Small Business Health Insurance Options

To understand whether tapping a PEO just for health insurance makes sense, you need to know your alternatives.

Traditional Small-Group Health Plans: These are insurance plans offered directly by insurers to businesses with 1-50 employees. You negotiate or shop through brokers, or through the Small-Group Health Plans marketplaces. SHOP Marketplace: The Small Business Health Options Program (SHOP) is a government-run marketplace for businesses under 50 employees. It offers some tax credits and standardized plans. Health Reimbursement Arrangements (HRAs): A newer alternative, HRAs let employers reimburse employees tax-free for individual health insurance premiums. This avoids the risk methods and pooling of group plans. PEO Group Plans: The PEO pools your business with others, allowing smaller companies to get better rates than they might score solo.

Each option has pros and cons, so it’s not a one-size-fits-all. But what often trips up small businesses is focusing only on premiums without understanding other cost drivers and employee preferences.

Understanding the True Cost Drivers of Health Coverage

When you see quotes from PEOs or insurers stating a $200-$300 monthly contribution per employee for health insurance, that’s your starting point, not the final bill. So, what else factors into the true cost?

Employee Contribution: This is typically the amount your employees pay monthly. A $200-$300 contribution assumes a mid-tier plan—neither bargain basement nor Cadillac. Expect premiums to be split roughly 50/50 between employer and employee, depending on your subsidy strategy. Employer Premium: The portion you pay monthly per employee. Small businesses often choose 50-75% of premiums to remain competitive. Administrative Costs: PEOs charge fees—sometimes per employee per month or a percentage of payroll—that can add hundreds more. Out-of-Pocket Costs: Deductibles, copays, coinsurance all affect actual health expenses your team pays, impacting satisfaction and perceived value. Regulatory Fees and Taxes: IRS rules, Affordable Care Act mandates, and state fees can add subtle costs. For example, the IRS keeps a close eye on health benefit compliance, and failing to meet standards could trigger penalties.

Bottom line? Don’t just fixate on premium numbers. Look at the total cost of ownership: premiums, fees, employee costs, and hassles.

The Pros and Cons of Using a PEO Just for Health Insurance

Pros:

Group Buying Power: PEOs pool employees from multiple businesses, often lowering premiums. Reduced Administrative Hassle: Handling billing, compliance, and paperwork falls on the PEO. Standardized Benefits: Simplifies plan selection and employee education. Access to Better Plans: Some plans aren’t available to stand-alone small businesses but open through PEOs.

Cons:

Higher Costs Than Expected: PEO fees can add up and may negate premium savings. Loss of Control: You might get locked into predetermined plans or limited carriers. Employee Input Often Ignored: Many small firms err by not involving employees before choosing plans, leading to poor satisfaction and low enrollment. Complexity of Partial Services: Using a PEO "a la carte" can get complicated since most expect you to buy a bundle.

Common Mistake: Not Getting Employee Input Before Choosing a Plan

This one baffles me. You wouldn’t buy a car without test driving it first, right? Yet, so many small businesses jump into selecting health insurance plans—be it through a PEO or directly—with zero employee feedback.

Why is this a disaster? Because employees have different health care needs and budget constraints. Some might want low premiums with high deductibles; others prefer richer coverage even if they pay more. Without input, you risk picking plans nobody wants, which can lead to:

Low enrollment in employer-sponsored plans. Extra administrative work handling waivers and questions. Reduced morale and perceived value of benefits.

Here’s a quick tip: survey your employees or hold a simple meeting before finalizing plan choices. The insight can save you money and headaches.

How the SHOP Marketplace and Tax Credits Work

If you’re considering options outside a PEO, the SHOP Marketplace does offer small businesses some advantages:

Tax Credits: If you have fewer than 25 full-time equivalent employees making average wages under about $56,000, you may qualify for a federal tax credit that covers up to 50% of your premium costs. Simple Enrollment: Employee choice and simplified paperwork. Guaranteed Coverage: Most small-group plans are guaranteed issue, meaning your employees get coverage regardless of health.

But—and it’s a big but—the tax credits phase out after two years, and some industries with high turnover don’t benefit as much. Also, you may not get the same plans or networks as through a PEO or direct insurance broker.

Crunching the Numbers: What Does $200-$300 Monthly Contribution Really Look Like?

Budget Item Estimated Monthly Cost Per Employee Notes Employee Premium Contribution $200 - $300 Typical mid-tier plan on PEO or marketplace Employer Premium Contribution $200 - $450 Assuming 50%-75% subsidy PEO Administrative Fees $50 - $100 Varies based on service level Out-of-Pocket Employee Costs (deductibles, copays) Varies Dependent on plan design IRS & Regulatory Fees Nominal ACA fees, compliance costs

Bottom line: You’re looking at $250 to $550 per employee, per month, all in. Factor in actual usage, employee satisfaction, and your business cash flow.

Is Using a PEO Just for Health Insurance the Right Move?

So, is it worth it? Well, if you hate dealing with insurance companies and want a hands-off solution with broad benefits, a PEO can be attractive. But more often than not, the added fees and loss of customization mean many small biz owners come out better by shopping Small-Group Health Plans or using tools like HealthCare.gov.

Using a PEO solely for health insurance—especially if you want “a la carte PEO services”—can feel like paying for a full tank of gas when you only need a quart of oil. You get the whole package, but not all parts are useful for your operation.

Final Thoughts: Treat Your Benefits Like Car Maintenance, Not Rocket Science

Think of employee benefits like maintaining a car. Hop over to this website You need to balance cost, reliability, and comfort. The cheapest oil change won’t keep your engine running well, but neither does throwing money at high-end fuel additives if your car doesn’t need them.

Health insurance through a PEO can be like buying an extended warranty that may or may not apply when you actually need it. Before signing on, consider your business size, budget, and what your employees truly want. Don’t overlook direct marketplaces like SHOP and tools on HealthCare.gov, and always get employee input before committing to a plan.

At the end of the day, your goal is to find a solution that keeps your team healthy, your finances stable, and your headaches minimal. That’s the real ROI of benefits for a micro-business.

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