PEO Compliance for Multi-State Employers: What HR Directors Need to Know at 200+ Employees

Professional Employer Organizations solved a real problem for growing companies: they bundled payroll, benefits, workers comp, and regulatory compliance into a single outsourced relationship. For a 50-person company expanding into three states, a PEO eliminated the need to build HR infrastructure from scratch. But somewhere between 200 and 500 employees, the math changes. The per-employee administrative fees that seemed reasonable at 75 employees start looking expensive at 300. The benefits plan options that were adequate for a startup feel restrictive for an enterprise. And the compliance obligations you thought you outsourced still create liability you need to manage.

We work with HR directors and CFOs at mid-market companies navigating the PEO question — whether to stay, optimize, or transition to in-house administration. Here’s what the compliance landscape actually looks like for multi-state employers using a PEO, and when it makes sense to make a change.

• PEOs manage compliance across multiple states, but the client company retains certain ERISA fiduciary obligations
• ACA reporting responsibility shifts to the PEO as the common law employer, but errors still affect your workforce
• Workers comp under a PEO averages your experience mod with the PEO’s pool — good for high-risk companies, potentially costly for low-risk ones
• Most companies hit the PEO cost crossover point at 200 to 500 employees, depending on industry and benefits complexity
• Transitioning from PEO to in-house requires 6 to 12 months of planning to avoid coverage gaps and compliance disruptions

What Compliance Your PEO Actually Handles

PEOs operate under a co-employment model where the PEO becomes the employer of record for tax and benefits purposes while the client company retains control over day-to-day management of the employees. This division determines which compliance obligations the PEO handles and which remain with the client. Understanding this split is critical, because most compliance failures we see in PEO arrangements stem from the client company assuming the PEO is handling something that actually falls on the client side.

The PEO typically handles payroll tax withholding and filings across all states, workers compensation insurance procurement and claims administration, employee benefits enrollment and COBRA administration, ACA reporting for applicable large employers, and unemployment insurance filings. What the PEO does not handle includes OSHA compliance at your worksites, immigration and I-9 compliance beyond initial verification, industry-specific regulatory requirements (healthcare licensing, DOT driver qualifications), and employment practices liability management including harassment training, accommodation processes, and termination procedures.

• PEO handles: payroll taxes, benefits admin, workers comp, ACA reporting, COBRA, unemployment insurance
• Client handles: OSHA compliance, I-9 ongoing verification, industry regulations, employment practices, hiring/firing decisions
• Shared responsibility: ERISA fiduciary duties, data accuracy for benefits enrollment, classification of exempt vs non-exempt employees
• The co-employment agreement should specify exactly who is responsible for every compliance function
• Request a compliance responsibility matrix from your PEO — if they can’t provide one, that’s a red flag

The ERISA Fiduciary Question

This is where PEO compliance gets complicated. Under ERISA, any person or entity that exercises discretionary control over a benefit plan or its assets is a fiduciary — regardless of what the co-employment agreement says. If the PEO sponsors the health plan and 401(k) plan as the plan sponsor, the PEO assumes primary fiduciary responsibility for plan administration, investment selection, and fee reasonableness. But the client company’s decision makers — your CFO, your HR director, your benefits committee — retain fiduciary duties for decisions they influence, like plan design selection, contribution levels, and vendor oversight.

We’ve seen companies assume their PEO arrangement eliminated their ERISA exposure, only to face Department of Labor audits where both the PEO and the client company were cited for fiduciary failures. The solution isn’t avoiding PEOs — it’s ensuring both parties carry adequate fiduciary liability insurance and that the responsibility split is documented and understood.

• PEO as plan sponsor assumes primary fiduciary liability for plan administration and investment oversight
• Client company retains fiduciary duties for plan selection decisions and contribution level approvals
• Both parties should carry fiduciary liability insurance — ERISA penalties can include personal liability for fiduciaries
• For 401(k) plans, monitor whether the PEO is meeting its prudent expert obligations on investment selection and fee benchmarking
• Document all fiduciary decision-making processes — DOL expects a documented, deliberative process, not rubber-stamping

When It’s Time to Leave the PEO

The PEO model delivers its highest value-to-cost ratio for companies between 25 and 150 employees. Above that range, the per-employee economics start to shift. A PEO charging $1,500 per employee per year in administrative fees costs a 300-employee company $450,000 annually — enough to fund two experienced HR professionals and a benefits administration platform, often with better plan options and more control.

The transition decision isn’t purely financial. Companies leave PEOs because they need better benefits to compete for talent, because their workers comp experience mod has improved and the PEO pool is costing them money, because they need specialized benefits structures like executive deferred compensation or international benefits, or because they’re acquiring companies and need to harmonize benefits across entities without being constrained by the PEO’s plan offerings.

• Cost crossover: PEO fees exceed standalone benefits + internal HR team cost (typically 200-500 employees)
• Benefits limitations: PEO plan options don’t meet your retention and recruiting needs
• Workers comp: Your experience mod is better than the PEO pool, and you’re subsidizing other clients’ losses
• M&A activity: Acquiring companies requires benefits harmonization that PEO structures can’t easily accommodate
• Control: Executive team wants direct carrier relationships, custom plan design, and proprietary benefits data