Business Owners... Why Use an Accredited PEO

ESAC Standards & Procedures

Financial Standards
  1. Adjusted Net Worth Requirement. An Accredited PEO must have Adjusted Net Worth in an amount which is the larger of $100,000 or five percent of Total Adjusted Liabilities as demonstrated by its audited financial statements and internal financial statements.
  2. Positive Working Capital Requirement. An Accredited PEO must maintain an adequate level of financial liquidity as demonstrated by maintaining Positive Working Capital. Provided however, an Accredited PEO may have Working Capital that is not Positive Working Capital for a period not to exceed six consecutive months so long as current liabilities are not more than two times current assets and the PEO maintains Positive Quick Working Capital. Notwithstanding the above financial liquidity requirements, all Applicants for accreditation must be able to demonstrate Positive Working Capital, and shall not be eligible for the Positive Quick Working Capital exception as part of the initial qualification for accreditation. Applicants and Accredited PEOs must maintain the level of financial liquidity necessary for licensure or registration in the states in which they operate.
  3. Calculation of Net Worth and Working Capital. An Accredited PEO’s calculation of net worth and working capital must be made in compliance with generally accepted accounting principles (GAAP) for a combined or consolidated statement of the financial condition of all PEO entities under common control and include a proper accounting of all transactions with non-PEO Affiliates and related parties including Responsible Persons, Captives, trusts and variable interest entities. Such calculation of net worth and working capital shall not include as an asset: (a) any receivable from a trust or captive operated for the exclusive benefit of the Accredited PEO, or (b) any receivable from an Affiliate, Responsible Person or related party Entity unless evidence of collectability acceptable to ESAC is provided. Any affiliated party receivable must also comply with the requirements of ESAC's Financial Standard regarding "Affiliated Party Receivable Reporting."
  4. Alternative Compliance Method for Adjusted Net Worth and Positive Working Capital Requirements. In lieu of a PEO meeting ESAC's Adjusted Net Worth and Working Capital requirements, the PEO's parent, owner or Responsible Person may provide one of the following forms of liquid assets or a guaranty in a form acceptable to ESAC, provided: (a) the PEO remains in compliance with the financial requirements for applicable state licensing; (b) the capital deficiency is temporary; and (c) the PEO agrees to provide monthly financial statements until such deficiency is cured:
    1. A bank certificate of deposit, irrevocable bank letter of credit, or other liquid security provided by the PEO's parent, owner or Responsible Person to satisfy up to 100% of the amount of the deficiency; or
    2. A guaranty of a controlling or parent company equal to at least 150% of the deficiency and in a form acceptable to ESAC may be used to satisfy up to 100% of the deficiency so long as an audited financial statement can be provided that demonstrates adequate Net Worth and liquidity to meet the obligation of the guarantor; or
    3. The personal guaranty of an individual who is a Responsible Person that is equal to at least 150% of the deficiency may be used to satisfy up to 100% of the capital deficiency if the guarantor provides a current personal financial statement and federal income tax return to ESAC's independent financial advisor, along with any other evidence required to verify sufficient income and sufficient unpledged or liquid assets to secure the guaranty (see Exhibit C).
    If a parent, owner or Responsible Person of an Accredited PEO chooses to submit an irrevocable letter of credit to offset any deficiency, such irrevocable letter of credit will be acceptable so long as: (i) ultimate responsibility for repayment of any sums disbursed under the letter of credit is not an obligation of the PEO or any Affiliated PEO; (ii) the letter of credit contains an "evergreen" clause, which automatically renews the letter of credit unless the issuer notifies the PEO and ESAC by 60 days prior written notice of the decision not to renew; and (iii) the letter of credit is issued by a financial institution authorized to do so under applicable state or federal banking laws.
  5. Financial Reserves. An Accredited PEO must have adequate financial reserves for all liabilities, including but not limited to all employee benefit and insurance policies, plans and programs where the maximum financial liability to the Accredited PEO exceeds payments made under such plan(s). This includes:
    1. All plans in which the PEO is Self Insured or Partially Self Insured; and
    2. All Fully Insured health and workers’ compensation insurance policies or plans that are not Fully Funded (i.e. Loss Sensitive); and
    3. Any other employee benefit plans maintained as permitted by state law that are not Fully Insured and Fully Funded.
    Examples of such plans include, but are not limited to, Self Insured plans, Partially Self Insured plans, minimum premium plans, captive plans, large deductible plans, retrospective rating plans, and any trust through which employee benefits are provided other than a Fully Funded trust that exclusively provides retirement benefits in connection with a retirement plan qualified under Section 401(a) of the Internal Revenue Code.

    Financial Reserves for such insurance and benefit plans shall be equal to the estimated Ultimate Liability for such plans, based upon generally accepted actuarial methods, including but not limited to incurred but not reported claims, incurred but unpaid claims, future claims development, retrospective premium adjustments, inflationary trends and the degree of risk. The Accredited PEO must demonstrate to ESAC that reserves for such insurance and benefit plans are adequate and are established based on actuarially developed estimates performed by an independent Certified Actuary who is a member of the American Academy of Actuaries, unless one or a combination of the following apply:

    1. The policy(ies) or plan(s) of workers' compensation insurance are Fully Insured by a licensed insurance carrier(s) and the Accredited PEO provides ESAC the annual confirmation of the carrier’s estimate of the PEO’s Ultimate Liability for both the current and all prior policy years.
      1. The PEO is responsible for providing a carrier confirmation letter from each current or former workers’ compensation carrier for which there is any potential remaining claim liability or any such carrier that continues to hold collateral for a potential claim liability.
      2. The written confirmation(s) must be transmitted in writing on the carrier(s)’ letterhead and signed by an authorized corporate manager or officer in a manner that is consistent with the content and form of Exhibit D.
    2. The policy(ies) or plan(s) of insurance are Fully Insured by a licensed insurance carrier(s) and the Accredited PEO provides ESAC with a copy of the policy of insurance or other legal contract between the Accredited PEO and the insurance carrier(s) that specifies the Ultimate Liability of the Accredited PEO under the policy or plan of insurance and the Accredited PEO demonstrates to ESAC that the Accredited PEO’s financial statements include financial reserves for such policy or plan equal to or in excess of the policy’s or plan’s Ultimate Liability.
    3. Loss sensitive dental, vision and/or prescription drug policy(ies) or plan(s) not covered by other applicable medical coverage at all times are at least 125% of the prior calendar quarter’s total reported claims for dental and vision plans and at least 125% of the prior calendar month’s total reported claims for prescription drugs. A written certification by the third-party claims administrator or insurance carrier(s) must be submitted along with the PEO's audited financial statements attesting to the amount of the prior calendar quarter’s total reported claims for dental and vision plans and the amount of the prior calendar month’s total reported claims for prescription drugs.
    An Accredited PEO must submit along with its quarterly financial statements a certification by management that financial reserves for all policy(ies) or plan(s) of insurance subject to the requirements of this standard have been estimated and adjusted if necessary for such quarterly financial statements and such plans were operated in compliance with this standard at all times during the reporting period. If requested by ESAC, provide a description of the methods and supporting documentation used to estimate the Ultimate Liability of all plans of self insurance or loss sensitive insurance plans or policies.

    If an Accredited PEO participates in or otherwise uses a Self Insured or Partially Self Insured employee benefit arrangement whose financial statements are separately maintained, the Accredited PEO shall submit such audited financial statements (including the auditor's report) to ESAC annually.

  6. Affiliated Party Receivable Reporting. A receivable from an Affiliate ("Affiliated Party Receivable") must be excluded from a PEO's assets for purposes of meeting ESAC financial standards, unless:
    1. The receivable is a loan receivable that meets the following four criteria:
      1. Such receivable has never been a trade receivable,
      2. Such receivable is evidenced by a promissory note or similar instrument bearing a reasonable rate of interest,
      3. Such receivable is amortized in substantially equal payments of principal and interest over not more than 60 months from the date of original advance, and
      4. Such receivable is not past due or otherwise in default as of the reporting date.
    2. The receivable is immaterial because its exclusion would not result in a failure to meet net worth or liquidity standards; or
    3. The PEO submits additional documentation that verifies to the satisfaction of ESAC the authenticity and collectability of the receivable for purposes of complying with ESAC’s financial standards.

    If the total amount of Affiliated Party Receivables otherwise treated as assets exceeds 33% of the Accredited PEO’s reported Net Worth as of the reporting date, the Accredited PEO’s Net Worth shall be reduced by the amount of Affiliated Party Receivables exceeding this 33% limitation unless:

    1. The parent is a publicly-traded company with Positive Working Capital and a Net Worth of at least 10% of its total liabilities; or
    2. The Accredited PEO provides ESAC with audited consolidated financial statements in which the Affiliate's financial statements are consolidated with those of the Accredited PEO. In such case, the consolidated entities must meet ESAC financial standards on a consolidated basis. Each non-PEO Entity included in the consolidated financial statements must execute a cross guaranty agreement in a form acceptable to ESAC guaranteeing the liabilities of each PEO Entity; or
    3. The Affiliated Party Receivable is backed by liquid assets or guaranty which complies with the requirements of ESAC's Financial Standard regarding "Alternative Compliance Method for Adjusting Net Worth and Positive Working Capital Requirements."
  7. Imminent Material Risk Provision. An Accredited PEO shall maintain its financial condition and operations in a manner that does not present an imminent material risk, including a Presumed Imminent Material Risk, to the financial soundness of such PEO or to ESAC’s Client Assurance Program. An Accredited PEO shall be in violation of this standard at such time as ESAC provides written notice to the PEO that ESAC has determined that an imminent material risk exists. However, if in such written notice, ESAC grants the PEO a time period within which to submit a corrective action plan, a violation of this standard shall occur upon (a) the expiration of such time period without the submission of such a plan or (b) the rejection by ESAC of a corrective action plan. In the event ESAC accepts a corrective action plan, the PEO shall be in violation of this standard if ESAC determines that the PEO has failed to maintain the requirements of such corrective action plan and provides written notice of such finding to the PEO and the PEO fails to cure such deficiency within five (5) business days of receipt of the notice.
  8. Audit. Annual financial statements for all PEOs must be prepared in accordance with generally accepted accounting principles ("GAAP") and accompanied by an unqualified audit report issued by an independent Certified Public Accountant who received a rating of pass or pass with deficiency, subject to approval of ESAC, as a result of its most recent peer review performed in accordance with the AICPA peer review standards.
  9. Financial Reporting. All PEO Entities under common control must be accredited and meet the following financial reporting requirements:
    1. Basis of Reporting. PEO Entities in an Accredited PEO Group may satisfy ESAC’s financial reporting requirements on an individual, combined or consolidated basis.
    2. State Regulatory Compliance. An Accredited PEO or PEO Group that provides combined or consolidated financial statements and operates in a state that requires ESAC to certify individual PEO Entity compliance with financial requirements for state licensing must either: (a) provide evidence that the state has agreed to accept the PEO’s combined or consolidated financial statement in lieu of evidence of individual PEO Entity compliance; or (b) provide supplementary consolidating schedules showing the balance sheet and income statement for each Entity that reconciles to the balance sheet and income statement provided as part of the combined or consolidated audited financial statements. The supplementary information should be referenced by the auditor, either with the auditor’s report on the consolidated financial statements or in a separate report, and the auditor’s opinion on the supplementary information should meet the requirements of AU-C Section 725 or the relevant section of the PCAOB's auditing standards, as applicable.
    3. Single Auditor Exceptions. The audited financial statements for all accredited PEO Entities under common ownership control must be prepared by the same independent Certified Public Accountant, except that either of the following two exceptions may apply for not more than one year: (a) the PEO is an applicant for accreditation with existing audited financial statements prepared by more than one independent Certified Public Accountant, or (b) an existing accredited PEO has expanded into a new state where the regulatory agency requires an audit prepared by an independent Certified Public Accountant licensed in that state. A Separately Accredited PEO may have a separate auditor.
  10. Internal Financial Statements. An Accredited PEO shall provide internal quarterly financial statements for all PEOs that meet the same financial standards and reporting requirements as annual audited financial statements, except the internal statements are not required to be reviewed or audited by an independent Certified Public Accountant.
  11. Captive Audit and Actuarial Opinion. A Captive that insures any risk of an Accredited PEO must be audited at least annually according to US generally accepted auditing standards and a copy of the audited statements provided to ESAC as part of the PEO’s annual submittal of audited financial statements. For any Captive providing insurance coverage to a non-Affiliate of an Accredited PEO, the Captive must demonstrate to ESAC that the financial reserves recorded in the Captive’s year-end financial statements are established based on actuarially developed estimates performed by an independent Certified Actuary who is a member of the American Academy of Actuaries. The financial condition of the Captive shall be considered by ESAC for purposes of determining the adequacy of recorded liabilities of the Accredited PEO.

    A Captive that insures any risk of an Accredited PEO must be domiciled in and subject to the regulation of an approved jurisdiction. An Accredited PEO that desires to use a Captive not subject to the regulation of an approved jurisdiction may use such a Captive only upon approval of ESAC, which approval shall not be unreasonably withheld if the proposed jurisdiction provides adequate regulatory oversight as determined by ESAC.

    In evaluating the financial reliability of a Captive that insures any risk of a non-Affiliate of an Accredited PEO, ESAC has the authority to require evidence of adherence to generally accepted best practices for Captives, including, but not limited to the following:

    1. A feasibility study that looks at all aspects of the Captive and validates its viability and economics, as well as whether the Captive will meet critical tests for risk shifting and risk-distribution as may be required by the Captive’s domicile;
    2. A written acknowledgement from the Captive’s management firm confirming that the Accredited PEO will not be subject to unanticipated taxation in states in which it has not done business;
    3. Confirmation that the Captive has complied with applicable IRS regulations and that each line of coverage separately meets the IRS tests for risk distribution, i.e., without regard to other lines of coverage being underwritten by the Captive; and
    4. A copy of the contract or insurance policy used by the Captive to insure the Accredited PEO’s risk.
  12. Related Party Transaction Reporting. An Accredited PEO’s financial statements shall reflect all Affiliated Party Transactions whereby the value or cost of any goods, services or benefits provided by or to the PEO shall be fully and accurately recorded in accordance with ESAC's Financial Standard regarding "Affiliated Party Receivable Reporting" and generally accepted accounting principles, including an adequate footnote description of the nature of the transaction. Without limitation, this requirement shall be applicable to any receivables, payables, provision of goods or services, or sharing of employees or other resources between an Accredited PEO and a Responsible Person or an Affiliate of the Accredited PEO or a Responsible Person or any independent entity operated primarily for the benefit of an Accredited PEO or its clients or employees.
  13. Disclosure to Auditor. An Accredited PEO shall provide a copy of these Financial Standards to its auditor at the time of engagement to audit the PEO's fiscal year-end financial statements.
  14. Startup Provision Concerning Audited Financial Statements. An Applicant PEO that (a) has not had sufficient operating history to provide ESAC with audited financial statements based upon at least 12 calendar months of PEO operations, or (b) does not demonstrate positive net income in its most recent audited financial statements, shall demonstrate to ESAC's satisfaction that the PEO will have sufficient capitalization at all times from the date of accreditation, including demonstrating compliance with ESAC's Financial Standards regarding "Adjusted Net Worth Requirement," "Positive Working Capital Requirement," and "Imminent Material Risk Provision." Prior to accreditation, the Applicant shall provide ESAC with its projection of monthly cash flow, profit-loss and additional capital contributions until PEO profitability is sustained. After accreditation, if requested, the accredited PEO shall provide ESAC with updated projections each month of its cash flow and profitability, along with each month’s financial statements. These monthly projections and monthly reporting of operating results will continue until the accredited PEO demonstrates consistent monthly profitability and provides ESAC with an audited financial statement covering at least 12 calendar months of PEO operations that demonstrate compliance with ESAC's Financial Standards regarding "Adjusted Net Worth Requirement," "Positive Working Capital Requirement," and "Imminent Material Risk Provision."
  15. Insurance Coverage. An Accredited PEO must carry the following minimum amounts of insurance coverage: View Insurance Coverage Table
  16. Parent Guaranty. An Accredited PEO that chooses to submit consolidated financial statements of a parent corporation must submit a guaranty by the parent of all the obligations of the PEO or PEO Group, executed in favor of the clients, worksite employees, insurers, and taxing authorities thereof.
  17. Cross Guaranty. Each Affiliated Accredited PEO, other than a Separately Accredited PEO or PEO Group, must submit a cross guaranty of all the obligations of each other Affiliated PEO in the PEO Group, executed in favor of the clients, worksite employees, insurers, and taxing authorities thereof. Within a Separately Accredited PEO Group, each Accredited PEO must submit a cross guaranty of all the obligations of each other Accredited PEO in the group, executed in favor of the clients, worksite employees, insurers, and taxing authorities thereof.
  18. Surety Bond. An Accredited PEO must qualify at all times for an individual surety bond underwritten by a surety carrier that is duly licensed in all states. This bond will be held by the Employer Services Trust for the benefit of the PEO's clients, employees and taxing authorities and must be in an amount equal to the greater of: (a) $250,000 or (b) 5% of the Accredited PEO's total federal and state employment tax liability* for the preceding calendar year as imposed by USC 26 Subtitle C and applicable laws of all states of operation, rounded up to the nearest $250,000 and not to exceed $1,000,000. * For these purposes, "state employment tax liability" means all taxes payable to a state by an employer that are either dependent on wages paid or withheld from employees.
  19. Surety Bond Qualification. An Accredited PEO must at all times meet the financial underwriting standards for bonding by ESAC's surety carrier for purposes of meeting the requirements of ESAC accreditation as set forth in these Standards and Procedures. These bonding requirements must be met based on the surety's underwriting without the PEO posting cash or cash equivalents that could otherwise reduce the surety carrier's risk and the value of the surety carrier's financial underwriting.
  20. Demonstrated History of Financial Responsibility. An Accredited PEO, its Responsible Persons and Affiliates must have a demonstrated history of responsible financial management of their business and personal affairs. Accreditation shall be denied to a PEO if the PEO, a Responsible Person or an Affiliate thereof has documented incident(s) of failing to meet personal or business financial responsibilities unless ESAC determines that the incident(s) are not relevant due to the nature and/or the time since occurrence.
  21. Timely Payment of PEO Employer Responsibilities. An Accredited PEO shall timely and accurately pay all Accredited PEO Worksite Employee wages, state and federal payroll taxes, employee benefit plan contributions, and workers' compensation and health insurance premiums for all plans of insurance sponsored or co-sponsored by the PEO and shall provide to ESAC the quarterly confirmation of such payments by an independent Certified Public Accountant. Such confirmation may be in the form of an Examination Level Attestation and/or Agreed-Upon Procedures as specified in Exhibit E.