How Small Businesses Work with PEOs to Reduce Their Business Costs
By Chris PetersonFirst published Updated
The short answer
Small businesses use PEOs to lower costs in four main areas: health insurance through the PEO's large pooled plans, retirement plans that share one PEO-sponsored 401(k), HR compliance help that heads off costly mistakes, and workers' comp through the PEO's program. Savings vary by company and aren't guaranteed.
Your entrepreneurial spirit led you to start your own business, and it worked. But success brought more employees, and more employees brought more HR paperwork, until the plans to take the business to the next level were sitting on a shelf collecting dust.
What if you could hand off the paperwork, get back the time to run the business the way you pictured it, and lower some costs along the way? Many small business owners do exactly that with a professional employer organization (PEO).
How does a PEO save a small business money?
1. Health insurance
Premiums keep climbing: the average employer family health premium was $26,993 in 2025, up 6% from 2024, and single coverage averaged $9,325, up 5% (KFF Employer Health Benefits Survey, 2025).
Group size matters: insurers price a five-person group very differently from a group of thousands. A PEO pools employees from many companies so you can buy plans closer to what large employers offer, and spreads the purchasing power across its clients. Your rate still depends on how your group is underwritten.
2. Retirement plans
Setting up and running your own 401(k) means setup, recordkeeping, administration and advisory fees, and a small plan with few assets tends to pay more in fees and has fewer providers to choose from. It can take years to build enough assets to bring fees down. Under a PEO, your company usually joins a multiple employer plan (MEP) that the PEO sponsors, which spreads those costs across many companies.
3. HR compliance
Employment law is complex and keeps changing. Even small errors can be costly and big ones can bring heavy fines; payroll tax mistakes alone draw IRS penalties every year. A PEO keeps track of the rules for you, which helps you avoid those fines and frees your time for the business.
4. Workers' compensation
Nobody likes to think about it, but claims happen. They're costly for two reasons: premiums and claims management. On your own, a small business doesn't get the rates larger organizations do. A PEO provides coverage through its own workers' comp program, offers safety services such as OSHA training to head off future claims, and has people to manage compliance, audits, paperwork and certifications.
What else can a PEO help pay for?
Think about what it costs to recruit good people and keep them, or to offer the learning and development programs younger workers look for. Many PEOs offer those services too, which gives a small company an edge in hiring.