[IMGCAP(1)][IMGCAP(2)]The National Association of Professional Employer Organizations has grown in membership, revenue and clout since its inception in 1984 .
NAPEO’s current membership consists of 300 professional employer organizations representing all 50 states as well as an estimated 200 service provider associate members. NAPEO’s member-PEOs generate more than 85 percent of the PEO industry’s $92 billion in gross revenues. NAPEO’s strong voice in government affairs, coupled with its ongoing outreach to key policymaking organizations, and collaborative relationships with prominent small business advocacy groups, is helping advance new regulations and guidelines that are further codifying the role of PEOs on behalf of their clients.
PEOs primarily serve the small business sector, although many PEOs also have clients in the middle-market category. Approximately 250,000 businesses and more than 2.5 million people are part of PEO arrangements. Currently, NAPEO is working with many of the states to update and modernize their PEO recognition processes.
Since 1999, NAPEO has allocated nearly $1 million of its membership dues to its Millennium Project. The Millennium Project funds specific state legislative initiatives focused on changing state laws to promote and protect the PEO industry and establish a more uniform and positive environment for PEOs nationwide which may result in new laws, guidelines or tax treatments with which CPAs should be familiar. However, a central focus of NAPEO has been on the federal Small Business Efficiency Act.
Small Business Efficiency Act
The Small Business Efficiency Act, or SBEA, was re-introduced in 2013 by Senators Charles Grassley, R-Iowa, and Bill Nelson, D-Fla., as S.479. NAPEO president and CEO Pat Cleary said,
“The Small Business Efficiency Act (S.479) will improve tax compliance and create needed certainty for small businesses so that they can focus on growing their companies while leaving benefits administration and tax compliance to the experts in the PEO industry. Legislation is long overdue to recognize and certify PEOs, an important provider of solutions for small businesses on everything from health care to regulatory compliance.”
The SBEA would provide important legal clarity in several ways. First, it would give credit to clients for federal payroll taxes paid by the client in a mid-year initial engagement of a PEO (under current conditions, the tax base would restart upon engagement with a PEO). Second, the SBEA would provide that a client satisfies its federal payroll tax obligation when it remits payment to a PEO. Finally, it would clarify that a PEO is not to be treated as a successor employer for the purposes of prior client liabilities. The protections of the SBEA would only be afforded to a certified PEO (CPEO).
The requirements contained in S. 479 for becoming a CPEO are very similar to requirements already found in many state laws. This year's version of the legislation has several changes from previous versions in previous years. Language was included to 1) increase the fee for a PEO to register for certification with the IRS to no higher than $1,000; 2) clarify that the fee paid to the IRS as part of the certification process is to be paid on an annual basis; and 3) require the IRS to better track clients of PEOs.
In order for a PEO to be a CPEO, it would have to post a performance bond and provide the IRS with the opinion of an independent CPA that the PEO has paid all of its federal taxes and its financial statements are in accordance with Generally Accepted Accounting Principles. If the SBEA is passed, it would grant legal status to PEOs, allowing them to collect and remit federal payroll taxes and therefore improve small business compliance with federal payroll tax law. The certification process would be voluntary for PEOs and would provide a safe harbor for small businesses that use certified PEOs. Ultimately the SBEA would provide needed certainty for small business, allowing that sector to better focus on growth and job creation.
Self-Imposed Accreditation Process Already in Place
The PEO industry already has in place an accreditation process to assure small businesses of the integrity of a PEO. It is a purely voluntary process with standards set by the industry itself. The NAPEO-formed Employers Services Assurance Corporation (E.S.A.C.) requires a PEO to meet stringent financial, professional and ethical standards. The financial component includes a requirement that financial statements be prepared and audited by an independent CPA who is a member of the American Institute of CPAs. E.S.A.C. provides assurance to clients of accredited PEOs through $1 million surety bonds held on behalf of each E.S.A.C.-accredited PEO plus a $10 million excess bond covering all program participants.
Regulators view E.S.A.C. accreditation very highly. The former director of unemployment insurance for the New York State Department of Labor, Dom Rotondi, commented, “The tangible value of E.S.A.C.’s program warrants the support and participation of the entire industry. These programs offer a solid foundation for the industry to develop an effective strategy for achieving reasonable and cost-effective regulation nationwide. Government regulators will view any industry’s self regulation efforts favorably if it includes meaningful standards and financial protection. This should be the PEO industry’s number one government affairs goal.”
Since E.S.A.C. first started the accreditation program in 1995, there has not been a single default by an accredited PEO, nor have there been any unresolved complaints or litigation.
Unlike the PEO industry-driven E.S.A.C. program, IRS certification under the SBEA would place the certification process at the federal government level rather than within the PEO industry itself, further ensuring mitigation of risk and increased protection for PEO clients.
Health Care Reform
While some fine points of the Patient Protection and Affordable Care Act, or PPACA, are still being ironed out, health care reform is fact and by Jan. 1, 2014, most of its requirements will be in full effect. This includes establishment of the health insurance exchanges, or marketplaces, with enrollment in the exchanges beginning on Oct. 1, 2013. One of the bright sides of health care reform for small businesses are the tax credits for which they may qualify and which will make it more affordable for them to provide health insurance for their employees.
To qualify for the PPACA tax credit, an employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible). Additionally, the employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate. And, the employer must pay annual average wages under $50,000. Currently, the credit is up to 35 percent of a small business’s premium costs, and for nonprofits meeting the same criteria the tax credit would be up to 25 percent.
In 2014, employers otherwise eligible for the credit will have to purchase insurance for their employees on the small business health marketplaces known as the SHOP. Also in 2014, the tax credit increases to 50 percent for qualifying small businesses and 35 percent for nonprofits. However, the credit phases out gradually for businesses with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.
Another positive aspect of the legislation is that insurers can no longer turn down employers with 2 to 50 employees based on the health status of their employees and/or dependents nor exclude employees (or their family members) with certain health conditions. Additionally, small businesses can no longer be canceled by insurers due to the illness of a covered member of their group.
Other key components of the Patient Protection and Affordable Care Act which are less favorable to employers include the elimination of lifetime coverage limits and restrictions on annual limits; children can no longer be excluded from coverage due to pre-existing conditions (this limitation will apply to all in 2014); young adults can remain on their parents’ health plans until age 26 (versus being dropped at age 19 or after finishing college); Medicare drug beneficiaries who fall into the “donut hole” coverage gap will get a 50 percent discount when purchasing brand-name prescription drugs; and new health plans are required to cover preventive services at no or little cost to patients.
The most important compliance issues for small businesses in PPACA are the required summaries of benefits and coverage, exchange notices to all employees, medical loss ratio rebates, new complicated tax reporting, and the employer mandate for those employers with 50 or more full-time equivalent employees (shared responsibility provision or play or pay or free rider penalty). These facets of the law will present the most difficulties for business owners both in understanding the requirements and then administering them.
PEOs are expected to be an important resource for helping their client businesses comply with and perform the due diligence associated with this health care reform legislation. Additionally, PEOs will be helping their clients comply with complex tax-related changes and changes pertaining to consumer-driven health care plans such as health savings accounts (HSAs) and health reimbursement accounts (HRAs).
Federal Agency Enforcement
In the same way that enforcement of the health care reform legislation is expected to be aggressive, so too has enforcement been stepped up by such regulatory agencies as the Equal Employment Opportunity Commission (EEOC), the National Labor Relations Board (NLRB) and the Internal Revenue Service (IRS), all of which are focusing on increased audits and investigations with the intent to collect and levy increased fines, penalties and charges and pursue litigation, as needed.
This heightened phase of enforcement is expected to further position PEOs with small and growing businesses that rely heavily on their PEOs for assistance with regulatory compliance.
New York’s Wage Theft Prevention Act
On Dec. 10, 2010, then New York Governor David Patterson signed the Wage Theft Prevention Act, which was then amended effective April 2011. Under the amended act, employers must give employees written notice of their regular and overtime rates 1) upon hire; 2) whenever their wages decrease (except that the hospitality industry must give such notice even for a wage increase); and 3) annually by February 1 of each year.
The notice must include the basis of the employee’s pay rate (i.e., whether the wage rate is calculated by hour, shift, day, week, salary, piece, commission, etc.), as well as disclose if the employer claims deductions for meals or lodging. The written notice must include the employer’s address and contact information and be provided in English as well as the employee’s primary language (if not English) as long as the New York State Department of Labor (NYSDOL) has developed a template in that language. Currently, the NYSDOL has templates in Spanish, Korean, Chinese, Russian, Polish and Haitian-Creole. The law also requires that certain and similar information be included on the pay stub of each employee.
PEOS are instrumental in assisting their client employers in complying with the act’s requirements. Those without a PEO’s assistance and challenged by these new requirements could face significant penalties. Failure to provide the written notice to new employees within 10 business days of their first day of employment could result in an action by either the Commissioner of Labor or the employee seeking to recover damages at the rate of $50 for each work week that the violation occurred along with costs and attorneys’ fees. If an employee sues to enforce the failure of the employer to provide the notice, such damages are capped at $2,500.
However, actions levied by the Commissioner are not capped and could therefore result in significant damages. Failure to comply with the provisions of the act can also result in severe monetary penalties beyond the above as well as criminal liability.
PEO services are advancing due to regulation and accreditation, but also because of their broader application of leading-edge technologies. In the performance of their broad employment administrative services (i.e., payroll and payroll tax administration, employee benefits administration, workers’ compensation, government compliance assistance , recruitment and hiring support, performance management, etc.), PEOs are using enterprise-level payroll and HR information systems programs that facilitate accurate and secure electronic submissions of payroll, time and attendance data, direct deposit functionality and a broad set of management information reports to assist their clients in their business oversight.
They are also offering Web-based information systems giving their clients and their employees 24/7/365 access to their employee benefits and payroll information. Some PEOs are even providing employee ID theft protection solutions which provide early warning, recovery and restoration services as part of their value-added services.
While they continue to demonstrate the increasing value they are bringing to their role as a total HR management resource, PEOs are also mindful of the impact that new laws and regulations will have in further validating their industry and removing any remaining obstacles or doubts.
Louis Basso is president and Barry Shorten is executive vice president of Alcott HR, a professional employer organization based in Farmingdale, N.Y.
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