Gulfshore Insurance > Gulfshore Blog > Commercial Risk Management > Workers’ Compensation Coverage Through a PEO

Professional Employer Organizations (PEO) have grown in popularity and provide many valuable services for their clients. In most arrangements between the PEO and its client, the PEO agrees to perform specified employer responsibilities for the leased workers, including some or all of the following…

  • Completing the withholding and reporting of payroll-related taxes (i.e. W-2 forms)
  • Accounting and paying wages for workers
  • Securing Workers’ Compensation (WC) insurance for employees

Since each state dictates guidelines for the administration of PEO WC policies, when a PEO obtains WC insurance for its client companies, it does so in one of two ways: a Multiple Coordinated Policy (MCP) or Master Policy. The descriptions below come from a very helpful FAQ published by the NCCI.

  • Multiple Coordinated Policy (MCP) – in an MCP arrangement, each client of the PEO has its own policy covering the leased workers. Each client’s premium is based on its own class codes, rates, payroll and rating programs. All policies are assigned to the same insurance carrier whenever possible, and endorsements are used to coordinate coverage between the client and the PEO.
  • Master Policy – in a Master Policy arrangement, a single policy is issued in the name of the PEO, which provides coverage for all of the PEO’s leased workers for each client. Each client is typically added to the policy by endorsement.

Depending on which type of program the PEO uses, an MCP or Master policy, it can have an impact on the ability of PEO clients to prove their individual history and results on a formal NCCI Experience Mod (EMR) worksheet. For PEO clients handled on an MCP, there is little worry. When a WC policy is written through an MCP, an individual client experience rating modification will be produced and applied using the clients own experience. On the flip side, however, when the WC is written using a Master Policy the PEO’s experience rating modification applies for all leased employees of its clients. In short, all clients of a PEO are thrown in a big pot and share the experience of each other. On a Master Policy, the PEO can still manually pull out (or charge back) individual client experience, but when it comes to producing a formal NCCI EMR Worksheet, they can’t do it without some paperwork and significant time (about 60 days).

What’s the Big Deal?

Providing individual experience isn’t too much of a big deal or hassle except in a couple of situations:

  • Leaving the PEO to purchase a standalone WC policy – If your company happens to be part of a Master Policy and wants to leave the PEO, the PEO’s insurance carrier will fill out a form NC2745 (or VA 1271 in Virginia and FL 1372 in Florida). This form is used to report individual client data like class codes, payroll, claims, etc. to the NCCI so they can generate a new EMR.
  • Proving individual experience EMR for bid specifications (for contractors) – all project owners will require proof of WC insurance, and also require a copy of the EMR from the NCCI. When WC coverage is provided through a PEO master policy, the NCCI mod worksheet used in bid specs will be that of the PEO, and not the individual client. This could prove a hindrance if the EMR of the PEO is >1.0 (a minimum requirement for some projects). If individual experience is needed the PEO client will have to go through the process of splitting information via the forms listed above.

A Profit Center for the PEO

One final thought that PEO clients should be aware of is how PEOs use WC as a profit center. Because the PEO is grouping hundreds or thousands of employees from various industries and backgrounds on a master policy (or MCP), they have enough premium coming in to retain a very large deductibles (LDD) on the policy. For these deductibles, the PEO receives significant premium credits from the insurer (75% or more is not unusual, depending on the LDD). The PEO essentially becomes the insurer for most of its clients, responsible for reimbursing the carrier as claims are filed. Since most PEOs will continue to collect a manually rated premium from their clients, but then take a significant deductible credit on the policy, the premium above the claim total becomes profit.

John Keller, CRM ARM CIC AAI is the Director of Risk Management and Claims at Gulfshore Insurance. John works with a wide range of business clients to deliver strategic risk analysis and guidance. Comments and questions are welcome at jkeller@gulfshoreinsurance.com

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