The PEO glossary

Administrative fee (PEO)

The administrative fee is the portion of a PEO invoice that pays for the PEO’s own services, charged either per employee per month or as a percentage of payroll.

ALE (Applicable Large Employer)

An applicable large employer averaged 50 or more full-time employees plus equivalents in the prior year and is subject to the ACA employer mandate.

ASO (Administrative Services Organization)

An ASO provides payroll and HR administration like a PEO but without co-employment: you remain the sole employer and taxes are filed under your own EIN.

Certificate of insurance (COI)

A certificate of insurance is a carrier-issued document summarizing an active insurance policy: the insured entity, carrier, coverage lines, limits, and policy dates.

Client Service Agreement (CSA)

The CSA is the contract defining the PEO relationship: the responsibility split, the fees, the termination terms, and what happens to your benefits when you leave.

Co-employment

Co-employment is the PEO industry’s term for a contract that divides specified employer functions between a PEO and its client; the label does not settle legal responsibility for every issue.

COBRA

COBRA gives employees who lose group health coverage the right to continue it at their own cost, and PEO transitions create COBRA events that must be administered correctly.

Composite rate (health premium)

A composite rate charges every enrolled employee in a coverage tier the same health premium, instead of pricing each person by age.

CPEO (Certified PEO)

A Certified PEO has passed IRS certification for financial fitness and bonding, and certification changes who is liable for federal employment taxes.

Deductible accumulator

A deductible accumulator is the running total of what a member has paid toward a plan’s deductible and out-of-pocket maximum during a plan year.

EOR (Employer of Record)

An employer of record generally hires a worker through the EOR’s local entity and assigns that worker to provide services to the customer.

EPLI (Employment Practices Liability Insurance)

EPLI covers defense costs and settlements for employment claims such as discrimination, harassment, retaliation, and wrongful termination.

ERISA

ERISA is the federal law governing employer benefit plans, setting fiduciary, disclosure, and claims rules for health and retirement benefits including those offered through PEOs.

ESAC accreditation

ESAC accreditation is the PEO industry’s financial assurance program: accredited PEOs meet audited financial standards and client payrolls are backed by surety bonds.

Experience mod (workers comp)

The experience modification factor scales workers comp premium up or down based on your claims history relative to your industry’s expected losses.

FICA

FICA is the federal payroll tax funding Social Security and Medicare: 6.2 percent each from employer and employee up to the annual Social Security wage base, plus 1.45 percent each for Medicare.

Form 8973

Form 8973 is the IRS form a certified PEO files to report the start or end of a service contract with a customer, anchoring CPEO tax treatment to specific dates.

Form 940

Form 940 is the annual federal return that reports and reconciles federal unemployment (FUTA) tax.

Form 941

Form 941 is the quarterly federal return that reports wages, federal income tax withholding, and Social Security and Medicare taxes to the IRS.

Full-time equivalent (FTE)

A full-time equivalent converts part-time hours into a count of notional full-time employees, the unit several laws use to decide whether a mandate applies to you.

FUTA (Federal Unemployment Tax)

FUTA is the federal unemployment tax: 6.0 percent on the first $7,000 of each employee’s wages, reduced to 0.6 percent for employers paying state unemployment tax on time.

FUTA credit reduction

A FUTA credit reduction raises federal unemployment tax on employers in states that have carried a federal unemployment loan balance for consecutive years.

Imputed income

Imputed income is the taxable value of a non-cash benefit that must be added to an employee’s wages, such as group life coverage over $50,000 or domestic partner health coverage.

Joint employment

Joint employment is a legal doctrine under which two businesses are both treated as an employer of the same worker for a specific law, decided by control tests rather than contracts.

Loss runs

Loss runs are the carrier-issued reports of your workers compensation claims history, the document underwriters use to price your coverage.

Master policy (workers comp)

A master policy is a single workers compensation policy held by a PEO that covers worksite employees across many client companies, in states that permit it.

MEP (Multiple Employer 401(k) Plan)

A multiple employer plan is a single 401(k) plan adopted by unrelated employers, the structure behind most PEO retirement offerings.

MEWA (Multiple Employer Welfare Arrangement)

A MEWA is a health or welfare benefit arrangement covering employees of two or more unrelated employers, the ERISA category most PEO health programs fall into.

Net rate (workers compensation)

A net rate is the single all-in workers compensation price a PEO quotes per $100 of payroll for a class code, with the PEO’s costs and any discounts already blended in.

New employer rate (SUTA)

The new employer rate is the default state unemployment tax rate assigned to an employer without enough history for an experience-based rate.

Pay-as-you-go workers comp

Pay-as-you-go workers comp calculates premium each payroll run on actual wages instead of an estimated annual premium paid up front.

PEO (Professional Employer Organization)

A PEO is a firm that co-employs a client company’s workforce to provide payroll, benefits, workers comp, and HR compliance as a bundled service.

PEP (Pooled Employer Plan)

A pooled employer plan is a 401(k) structure created by the SECURE Act that lets unrelated employers join one plan run by a registered pooled plan provider.

PEPM (Per Employee Per Month)

PEPM, or per employee per month, is the unit PEOs and HR vendors use to quote prices: a fixed dollar amount charged monthly for each active employee.

Schedule R (Form 941)

Schedule R is the IRS allocation schedule that CPEOs and Section 3504 agents file with Form 941 to break down aggregate employment tax filings by client.

Section 125 plan (cafeteria plan)

A Section 125 cafeteria plan lets employees pay their share of benefit premiums with pre-tax dollars, and one must exist for pre-tax deductions to be legal.

Section 3504 agent

A Section 3504 agent is a payroll agent authorized by the IRS to withhold, report, and pay employment taxes on an employer’s behalf, with both parties remaining liable.

Stop-loss insurance

Stop-loss insurance reimburses a self-funded health plan when claims exceed a set threshold, either per person (specific) or in total (aggregate).

SUTA (State Unemployment Tax)

SUTA is the state payroll tax funding unemployment benefits; PEO arrangements can change whose rate and account your wages are reported under.

Wage base restart

A wage base restart can occur when a midyear employment-tax reporting change causes annual taxable-wage counters to begin again under a different employer or account.

Workers comp class code

Class codes group jobs by injury risk and set the base rate per $100 of payroll for workers comp premium; most states use the NCCI system.

Worksite employee

A worksite employee is a client company employee covered under a PEO arrangement, and the label carries specific weight in federal CPEO tax rules.