Small businesses struggling to maintain compliance with the constant flow of regulations impacting human resources and benefits compliance have increasingly turned to professional employer organizations (“PEOs”) to serve as payroll agent or, in some circumstances, co-employer of their employees.  On May 4, 2016, the IRS released temporary and proposed regulations that implement a new voluntary certification program for PEOs.

The application process for becoming certified will open on July 1st.  A revenue procedure further detailing the application process will be released in next several weeks, after which time the IRS will publish lists of certified PEOs (CPEOs).  The IRS welcomes public comment on these regulations – the deadline for submissions is August 4th.

Requirements to become a CPEO appear quite demanding.  A PEO applicant along with the PEO’s “responsible individuals” (including certain owners, directors, officers, and individuals with ultimate responsibility for managing the PEO) must submit an application to the IRS and satisfy certification requirements.

In addition to satisfying the certification requirements, PEOs must meet these requirements on an ongoing basis after becoming certified.  If they do not, a CPEO may have their certified status revoked or suspended, in which case the IRS will make this information available to the public and the CPEO will have to notify their clients.

To submit an application, a PEO applicant must permit the IRS to investigate its statements and submissions.  Each of the PEO’s responsible individuals must also pass background and tax compliance checks as well as submit fingerprints.  The regulations generally require that PEOs:

  • Have one or more physical business locations in the US and a majority of responsible individuals residing in the US;
  • Provide the IRS with audited financial statements on a regular basis;
  • Post a bond issued by a surety company that meets certain requirements for the payment of federal employment taxes;
  • Provide the IRS with quarterly assertions and examination level attestation regarding compliance with federal employment tax withholding and depositing requirements; and
  • Present an independent CPA’s opinion that their financial statements reflect positive working capital.

Of course, there is no discussion in the regulations concerning the benefits of becoming a CPEO.  It may simply be that the CPEO designation will assist the IRS in regulating this burgeoning industry.  In any case, becoming certified is likely the new benchmark for PEOs to attract clients moving forward.