Leaving a PEO Checklist: Be Prepared to Part Ways

Small and mid-sized companies often find their PEO isn't a great fit. If you're more and more frustrated with your PEO's performance and support, it may be time for a change. A PEO handles payroll, benefits, HR support, tax administration and compliance help, so leaving can disrupt critical functions if you don't prepare. Here's how to make the transition painless.

When should you plan to leave a PEO?

Most PEO contracts need written notice before you leave, commonly 30, 60 or 90 days, and many renew on their own if you miss the window. January 1 or the first day of a quarter is usually the cleanest start date. Start shopping 60 to 90 days before your benefits renewal.

Timing matters for payroll taxes too. Moving mid-year to or from a PEO that isn't IRS-certified generally restarts the Social Security and federal unemployment wage bases, so some taxes get paid twice; moving to or from a certified PEO (CPEO) carries them over (26 U.S.C. 3511). Your CPA can confirm how this applies to you.

How do you prepare to leave a PEO?

Collect all employee information

Your PEO holds important payroll and employee data. Get everything you need before the contract ends, including:

• Your company's Employer Identification Number and state account numbers
• Employee direct deposit information
• Employee names, addresses, marital status and dates of birth
• Employee tax information: filing status, deductions, and federal and state tax filing numbers
• Year-to-date payroll, PTO balances and benefit elections

Plan for taxes

If you leave mid-year, the PEO handles taxes through your last day and issues W-2s for that period. Your business, new PEO or payroll service picks up from there, so employees will likely get two W-2s for the year.

Plan for payroll

If you aren't moving straight to a new PEO, have a payroll plan in place before you leave. Getting paid on time is every employee's priority, and any new service needs time to set up.

Plan for benefits

If your PEO handled benefits, you'll take that responsibility back. Research carriers and plans, and check for pending claims before termination, since you may still owe administration fees until they're resolved. Deductibles may reset under a new plan, so tell employees in time to plan for medical and dental costs.

Plan for retirement accounts

Employees may need to move their 401(k) balances into an IRA or your new 401(k). Have help ready for them.

Honor employee leaves

Know the current policy on leaves of absence, including parental and disability leave; you may have to honor leaves granted under the PEO. Have your own policy set and communicated before the termination date.

Is it worth the trouble?

The list can look overwhelming, but it shouldn't keep you tied to a PEO that isn't working. With the right guide, you can be matched with a PEO that solves the problems you're facing, or confirm that staying put is the better call.