Partnering with a Professional Employer Organization (PEO) can be a game-changer for small and mid-sized businesses. The right PEO provides access to high-quality benefits, streamlines HR operations, and ensures compliance—all while saving your business time and money. But not all PEOs operate with full transparency, and some use pricing models that quietly increase costs without delivering additional value in return.
A prime example? How certain PEOs, like ADP Total Source, leverage Section 125 of the IRS Code to boost their own revenue at the expense of their clients.
The Section 125 Loophole: A Hidden Cost for Employers
Section 125 allows employees to pay for benefits—such as health insurance, FSAs, and HSAs—with pre-tax dollars, reducing their taxable wages. This is a great advantage for both employees and employers, as it lowers payroll taxes. However, some PEOs bill their clients based on gross payroll rather than taxable payroll, capturing fees on pre-tax deductions that shouldn’t be included.
How This Inflates Costs
When a PEO calculates its administrative fee as a percentage of payroll, it should be based on taxable payroll—the actual wages subject to taxes. But ADP, for example, bills on gross payroll, meaning pre-tax deductions don’t reduce the amount subject to its percentage-based fee. This simple adjustment allows them to pocket an extra $7.65 for every $100 in employee pre-tax deductions—an unnecessary cost that adds up fast.
Many businesses don’t realize they are overpaying, as these billing details are often buried in the fine print. Over time, these hidden fees erode the cost savings that made the PEO model attractive in the first place.
How PEO 360 Protects You
At PEO 360, we take a different approach. As an unbiased PEO advisor, our job is to ensure businesses get the best possible pricing, service, and long-term value from their PEO.
Here’s how we help:
- Transparent Pricing Analysis – We review your existing PEO contract to uncover hidden fees and ensure you’re getting fair pricing
- Competitive Benchmarking – Our extensive industry partnerships let us compare multiple PEOs, so you can secure the most cost-effective solution for your needs and growth plans
- Negotiation Support – We help you negotiate flat-fee pricing structures that eliminate these unnecessary variable costs
- Ongoing Advocacy – Unlike PEO sales reps who disappear after the contract is signed, we provide ongoing support to make sure your PEO relationship continues to work for your business – year after year.
The Bottom Line
A great PEO should help your business save money, reduce risk, and improve efficiency—not sneak in hidden fees that drive up costs. By working with PEO 360, you gain an expert advisor who ensures that your HR outsourcing strategy is truly delivering value.
Ready to optimize your PEO strategy? Connect with our team today to get a free, unbiased analysis of your PEO options.
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