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Bracing for Obamacare, Some Businesses Try PEOs

Some entrepreneurs are turning to professional employer organizations to navigate health reform's complexities.

Opinions expressed by Entrepreneur contributors are their own.

ESCO Communications, an Indianapolis-based audio/visual equipment installer, has provided health insurance for its 100 employees for more than 40 years, but when CEO Chip Roth was faced with 40 percent price hike on the company's plan last year, he realized he needed to make a change. The cost increase--coupled with expected complexities of the Affordable Care Act, often referred to as Obamacare--led Roth to WorkSmart Systems, a local professional employer organization that pools for the employees of 200 small companies.

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"Health insurance was the real driver," Roth says. "By joining a larger pool and spreading the risk around, we were able to keep our rates the same as they were."

Related: Tax Dilemmas Add to Burden of Healthcare Reform for Entrepreneurs

With insurance premiums on the rise and health reform kicking into high gear, many small companies are looking for strength in numbers. Some are joining PEOs so they can provide a menu of affordable health plans to their employees, and outsource the complex administrative tasks associated with them. Matt Thomas, founder and president of WorkSmart, says his company is on track to double its sales in the three years ending in December 2015. "A lot of that has to do with the Affordable Care Act," he says. "Even larger companies that wouldn't normally look at PEOs are looking now, so they can avoid some of the ramifications of [the law]."

PEOs, available for the past 30 years, provide health benefits and handle human resources tasks, including , workers' compensation insurance and other benefits. And because a PEO does all of this for a group of companies, rather than just one, it can typically achieve economies of scale that individual companies can't. The most recent data indicates that the sector is growing: PEO industry revenue reached $92 billion in 2012, a 13.6% increase over 2010, the year the health legislation was signed into law, according to the National Association of Professional Employer Organizations in Alexandria, Va.

Related: Is It Time to Outsource Human Resources?

PEOs generally charge a flat monthly fee per employee or paycheck, or they take a percentage of each client's total payroll. If a PEO does its job well, it should generate enough savings for their clients to offset those fees, says Jay Starkman, founder and CEO of Engage PEO in St. Petersburg, Fla. "Insurance companies reward the aggregation of [employees], so oftentimes PEOs are able to deliver a 5 percent savings to their clients," on , he says.

PEOs also say they save small companies the hassle and cost of hiring their own in-house HR staff, who could cost more than $80,000 a year in salary and benefits a piece. "A PEO does all the stuff that's not essential to your core ," Starkman says.

There can be drawbacks to joining PEOs, however. Because a PEO acts as a co-employer, you may feel as if you're losing some degree of control over your employees. And how competitive a rate your PEO gets for health insurance will depend on the overall demographics and health status of all the employees it is insuring--factors that are out of your control and that will likely change over time.

A big reason PEOs are seeing a bump in interest these days is that many small companies simply need help wrapping their brains around the new health law, says Pat Cleary, CEO of NAPEO. All companies with 50 or more full-time employees will have to offer health insurance, but the intricacies of complying with the law can be hard to navigate. "The perils and pitfalls that are in there for any are significant," Cleary says. "The biggest advantage, in my view, of going to a PEO is to be able to say, "Figure this out for me.'"

Related: Employee Issues? Get Professional Help

Frank Romero, chief revenue operations officer of Evanston, Ill.-based Grocer Exchange, a network of independent supermarkets, says he's more comfortable with health reform since he signed on with Engage PEO in January of this year. "The owners of our supermarkets, which are typically manned at a rate of 30 to 40 people per store, need this, because they can't afford to do this administration themselves," Romero says. "And the PEO brings to the table benefits savings that they could never get themselves."

Entrepreneurs considering a PEO can check out NAPEO's website for a full checklist.

Corrections & Amplifications: An earlier version of this story misstated the name of Chip Roth, CEO of ESCO Communications.

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