Last month, the National Association of Professional Employer Organizations (NAPEO) held its annual PEO Capitol Summit in Washington, D.C. Aligned with the second-annual National PEO Week, the PEO Capitol Summit is a unique opportunity to hear from lawmakers and discuss issues critical to the PEO industry.
Since this is an election year, it’s not too surprising to find the buzz in the Beltway was booming when it came to regulation and other legal matters. Here are nine key takeaways from this year’s Capitol Summit that PEOs should be aware of:
AI Overview
1. The Transformative Power of AI
What It Is: Artificial Intelligence is as revolutionary as electricity and the internet were for previous generations. Existing capabilities already include lifelike video creation based on simple prompts and real-time translation of conversations into different languages. And this is just the tip of the iceberg for what’s to come.
Key Takeaway: Get on the AI train or get run over by it. All businesses should be considering ways AI can be leveraged to accelerate internal productivity, support their workforce, and provide unique offerings to their clients. Those that do not will quickly be at a competitive disadvantage. That said …
2. Decision-making Bias
What It Is: AI models use algorithms to interpret subsets of data and make decisions. By definition, those decisions will be biased toward results aligning with patterns in that dataset, as well as user and programming objectives. Even if facially neutral and well-intended, these models can lead to impermissible bias and discrimination based on race, gender and other classifications.
Key Takeaway: When using AI tools to make employment decisions, monitor for bias and, specifically, disparate impact on protected classes of candidates and employees. Question third-party vendors on the data used to train their systems and their validation processes. Maintain human oversight and note that important decisions outsourced to AI may be subject to more, not less, scrutiny.
3. Governance Policies
What It Is: The power of AI also makes it inherently dangerous. Besides bias, there are privacy, copyright, dependency, accuracy and deepfake concerns as well. PEOs are in the unique position of working with SMBs who may be unaware of these risks. The National Institute of Standards and Technology released an AI Risk Management Framework in April, providing guidance to both developers and deployers of AI technology. State and federal standards have also been evolving. Notably, Colorado passed a landmark AI bill last month, establishing stringent requirements whenever AI is used to make “consequential” decisions.
Key Takeaway: Before unleashing AI in your organization, start with a governance policy designed to ensure safe, ethical and compliant adoption. Organize an AI governance team to identify risks; stay on top of evolving standards; and set internal practices on how AI will be evaluated, developed, implemented, monitored and used.
The Tax Landscape
4. The Oregon Predicament
What It Is: Being a PEO in Oregon isn’t easy. Two years ago, the state enacted requirements prohibiting PEOs from calculating and reporting Paid Family Medical Leave on the client level. The result: Small businesses are taxed at a higher rate and lose flexibility in adopting private plans. Then earlier this year HB 4005 was introduced to effectively kill co-employment in Oregon, stating that an employee “may not be considered to be employed by more than one employing unit.”
Key Takeaway: The PEO model is alive and well in Oregon. NAPEO worked with some of its members to squash HB 4005, and projects that the state will revisit previously proposed legislation that would treat SMB clients as distinct entities for PFML purposes.
5. Federal Reform
What It Is: Major provisions of the Tax Cuts and Jobs Act of 2017, including rate reductions, are set to expire at the end of 2025. Extending it as is would add trillions of dollars to the federal debt in the next decade. Legislators and analysts agree a new bill is needed. Opinions vary on what the bill should include. NAPEO, for instance, would like to see PEO indemnity for client tax credits, which is likely not a focal point for most legislators.
Key Takeaway: Expect a major tax bill by the end of next year with various provisions impacting service providers, employers and employees alike … the details of which are to be determined.
6. Employee Retention Tax Credit Updates
What It Is: The moratorium on IRS ERTC claim processing continues. In the interim, the IRS has been implementing a new high-resolution system with enhanced fraud detection analysis. Outstanding 941-X submissions, which were all filed on paper, are all being processed through the new system. On June 20, the IRS released an update on its progress and initial findings, noting that only 10% to 20% of remaining claims have been identified as low risk. The IRS intends on “judiciously” processing these claims first, and—should the moratorium be lifted—will issue some initial payments later this summer.
Key Takeaway: Be patient and expect audits. The moratorium will (presumably) be lifted. But when it does, the IRS will take a more scrupulous approach to reviewing outstanding claims, and audits of a single small and medium-sized business (SMB) client on a PEO 941-X will delay the processing of all other SMB claims on that return.
Recurring Guidance
7. Employee-Owner Misclassification
What It Is: K-1 partnership pass-through income is not W-2 wages and should be reported separately, even under a PEO relationship. Some business owners may have misclassified these earnings as W-2 wages, and then improperly included these wages as part of their ERTC claim.
Key Takeaway: Review the K-1 W-2 distinction as necessary with your clients. With its new technology, the IRS may easily identify instances of wage misclassification that were used to increase an SMB’s ERTC claim.
8. Customer Service Agreements Updates
What It Is: While historically PEO Customer Service Agreements may have leaned heavily into the co-employment relationship, more nuanced language—clearly outlining roles and responsibilities—may now be more appropriate. Overrepresentations of “employer status” may be taken at face value and inadvertently subject a PEO to litigation and penalties for matters outside of its domain.
Key Takeaway: Times change, the PEO industry has evolved, and so should your CSAs. Regularly review and update your CSA agreements with the help of an experienced PEO attorney.
9. Tax Sheltered Wellness Plans
What It Is: Employers regularly adopt wellness plans that are funded with pretax contributions. Under such arrangements, the plan then reimburses employees, tax free, either automatically without proof of any expenditures and/or for any spending broadly classified as “wellness.”
Key Takeaway: Use caution before adopting a wellness plan offering a completely “tax sheltered” structure. While state regulators may be OK with this arrangement, the IRS has recently stressed in 2023 and again in 2024 that contributions to such plans are taxable if the plan offers reimbursement for anything other than bona fide medical expenses.
Learn more about how PrismHR can help your PEO stay in compliance.
Chris Babigian is PrismHR’s compliance strategy manager. A graduate of Boston University School of Law with a focus in taxation, Chris spent five years handling motions, appellate briefs and trial discovery for a civil litigation firm. In 2014, Chris transitioned to PrismHR, where he translates regulatory requirements into software solutions.
