New CPEO Designation Holds Professional Co-Employers to a High Standard
In late 2014, the IRS established the voluntary Certified Professional Employment Organization (CPEO) program. Last month, the government agency issued notices to the first of only 84 PEOs in the nation who have met the rigorous standards required to earn the designation of CPEO.
Local firm LBMC Employment Partners, a member of the LBMC Family of Companies, is among those first 84. "We are very excited to be included in the first group to be awarded the CPEO designation by the IRS," said Sharon Powlus, partner with the firm.
Although the application and review process was complex - and the ongoing compliance requirements to maintain CPEO status rigorous - Powlus said LBMC Employment Partners, along with other PEOs across the nation, have long supported the idea of certification. "We want our clients to be confident that they have an entrusted and dedicated business partner with the financial backbone to act as their co-employer," she stated.
What is a PEO?
Professional Employment Organizations have been around in one form or another for several decades. "A PEO is where we enter into a co-employment relationship with a client," explained Powlus. "We pay all of their employees under the PEO's tax ID so basically we become the administrative employer, and the client remains the worksite employer."
Key functions of a PEO include oversight of payroll functions and securing benefits. Powlus said the arrangement is particularly beneficial for small-to-midsize businesses. "You get the economies of scale with all these employees coming together," Powlus said of the negotiating power the entire group enjoys when it comes to purchasing benefits for their employees. "Our sweet spot is physician practices and professional services," she noted, adding LBMC has clients in their PEO with employees across 42 states.
A third critical function is the human resources piece. Powlus said PEOs carry employment practices liability insurance (EPLI), which they extend to clients. The PEO also offers support in the event an employee is terminated to help ensure employers are compliant with state and federal regulations.
Why the Specialty Designation?
Strongly supported by the National Association of PEOs (NAPEO), Powlus noted, "They've been lobbying the IRS for some time for a certification or designation."
The reason? While certainly most PEOs work hard on behalf of their clients, Powlus noted that, as with any industry, there are some who are "not in it for the right reason." When that happens, significant sums of money could be impacted.
Part of a PEO's function is to collect money from a client to pay required taxes and premiums. That money is combined with other clients' payments and submitted under the PEO's tax ID number. "When PEOs were started, there were some who took the dollars but didn't submit the money for payroll tax or premiums for benefits," she said. By the time a client finds out their obligations haven't been met, the dollar amount owed would have snowballed through fines and penalties.
NAPEO pushed for a professional designation so clients would have an additional layer of confidence in the financial and operational compliance of the CPEO. "If we chose, as we did, to go through the onerous process of certification, our clients would have confidence in the fact that we are remitting payments on their behalf," Powlus said of the impetus to achieve certification.
The CPEO Difference
In order to obtain the new designation, PEOs must submit an application, have a surety bond in place that must be activated within 30 days of certification approval, submit an annual financial audit to the IRS, submit quarterly reports to the IRS based on additional guidelines, keep positive working capital, and create and execute a CPEO contract with clients, among other requirements.
While PEOs have technically had responsibility for employees' wages and taxes under the client contract, the CPEO program formally specifies who assumes liability for federal taxes in the relationship between the CPEO service provider and their clients. CPEOs must meet the strict auditing and reporting standards of the Small Business Efficiency Act (SBEA) and assume financial responsibility for federal employment tax payments for its eligible clients' worksite employees. Additionally, federal payroll tax liability payments must be guaranteed.
If, for example, a client owed additional taxes due to a calculation mistake made by the CPEO, the client wouldn't have to worry about penalties. "We'd collect the additional taxes from the client because they were owed, but we would pay any penalties or interest," Powlus explained.
Other benefits include client access to additional tax credits including the Work Opportunity Tax Credit and no longer having to restart the payroll tax wage base if a client joins a CPEO midyear. The latter benefit is particularly important for practices and businesses with highly compensated individuals. "This eliminates double taxation on FICA and FUTA, and this alone is a victory for our industry and our clients," said Powlus.