ESAC Standards & Procedures

Financial Responsibility Standards

  1. An ESAC-accredited PEO, its Controlling 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 Controlling Person or an Affiliate thereof has documented incident(s) of failing to meet personal or business financial responsibilities unless ESAC in its sole discretion determines that the incident(s) are not relevant due to the nature and/or the time since occurrence.
  2. An ESAC-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 a Schedule of Net Worth included as part of its audited financial statements and interim financial statements in a form prescribed by ESAC.
  3. An ESAC-accredited PEO must maintain an adequate level of financial liquidity as demonstrated by maintaining a Current Ratio of at least 1.0. Provided however, an accredited PEO may have a Current Ratio of less than 1.0, but not less than 0.5, for a period not to exceed six consecutive months if the PEO maintains a Quick Ratio of at least 1.0. A calculation of the PEO’s Current Ratio and Quick Ratio shall be included as part of its audited financial statements and interim financial statements as required by ESAC’s application and accreditation maintenance procedures.
  4. A PEO which has not had sufficient operating history to provide ESAC with audited financial statements based upon at least 12 calendar months of operations, must have sufficient capitalization at all times to meet Financial Responsibility Standards 2 and 3, above, based upon monthly projections of cash flow and profit-loss and monthly or quarterly pro-forma balance sheets, on an ongoing basis during the subsequent 12 calendar months.
  5. In lieu of an applicant or ESAC-accredited PEO meeting the Adjusted Net Worth and financial liquidity standards specified above, the PEO may provide a guaranty, irrevocable letter of credit, surety bond or other security, in all cases acceptable to ESAC and in sufficient amount to offset any deficiency. Provided however, a guaranty will not be acceptable to satisfy a deficiency unless the PEO submits adequate evidence that the guarantor has sufficient net worth and liquidity in the sole judgment of ESAC to satisfy the obligation of the guaranty. The deficiency being covered by the guaranty shall not exceed 25% of the amount required to meet ESAC net worth and liquidity standards. Such guaranty shall be in a form provided by ESAC (Exhibit C). Annual audited financial statements of the parent corporation or other guarantor must be submitted to ESAC in the same manner as required for the PEO by ESAC’s application and accreditation maintenance procedures.


    If an applicant or ESAC-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: (a) ultimate responsibility for repayment of any sums disbursed under the letter of credit is not an obligation of the PEO or any Affiliated PEO; (b) 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 (c) the letter of credit is issued by a financial institution authorized to do so under applicable state or federal banking laws.
  6. An ESAC-accredited PEO must have adequate reserves for all state and federal tax liabilities incurred but unpaid and for all plans of self-insurance, loss-sensitive insurance policies or plans, and employee benefit plans. These types of insurance programs include but are not limited to self-insured plans, partially self-insured plans, minimum premium plans, captive plans, large deductible plans, and retrospective rating plans where the maximum financial liability to the applicant is not Fully Funded by current premium payments. Reserves for such insurance and benefit plans shall be equal to the estimated ultimate liability, 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. A Certified Actuary must opine as to the reasonableness of the reserves of such insurance and benefit plans at the end of each fiscal year, unless one or a combination of the following apply:
    1. The policy(ies) or plan(s) of insurance are fully insured by a licensed insurance carrier(s) and an appropriate corporate underwriter or actuary employed by such carrier(s) has provided a written certification of the adequacy of such reserve amount with respect to the PEO’s expected liability related to claim losses, or, such reserve amount is equal to the maximum liability of the PEO related to claim losses under the terms of the insurance policy, a copy of which certification or policy is submitted along with the financial statements; or

    2. The reserves for the portion of loss-sensitive insurance policies or plans with respect to dental, vision and/or prescription drugs at all times are equal to or greater than 125% of the prior calendar quarter’s total reported claims for dental and vision plans and equal to or greater than 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 and attesting that all such reported claims have either been paid by the response date of the third party claims administrator or insurance carrier or that as of such date the third party claims administrator or insurance carrier has sufficient funds to pay such reported claims.

    An ESAC-accredited PEO must submit along with its quarterly and annual financial statements: (i) a certification by management disclosing the methods used to estimate the ultimate liability of all plans of self-insurance or loss-sensitive insurance plans or policies; and (ii) an attestation of management that such plans were operated in compliance with Financial Responsibility Standard #6 at all times during the reporting period.

    (Note: Upon request, ESAC will provide applicants and ESAC-accredited PEOs with a list of qualified actuaries knowledgeable of PEO operations and ESAC requirements if an actuarial opinion is required.)
  7. An affiliated party receivable must be excluded from a PEO's assets for purposes of meeting ESAC financial standards, unless:
    1. The receivable qualifies as a current trade receivable incurred in the ordinary course of business with terms of payment similar to that of non-related clients and which, as of the reporting date, is not past due or otherwise in default;

    2. The receivable is immaterial because its exclusion would not result in a failure to meet net worth or liquidity standards;

    3. The PEO submits additional documentation that verifies to the satisfaction of ESAC the authenticity and collectibility of the receivable for purposes of complying with ESAC’s standards; or

    4. The receivable is a loan receivable that meets the following three criteria:

      1. Such receivable is evidenced by a promissory note or similar instrument bearing a reasonable rate of interest,

      2. 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

      3. Such receivable is not past due or otherwise in default as of the reporting date.

    For purposes of d., above, the date of original advance shall be the date(s) on which the accredited PEO advanced funds or extended credit to the affiliated party without regard to the form of receivable at the time of advance. Except as permitted in the transition provision contained below, affiliated trade receivables shall not be converted into loan receivables.

    Any portion of an affiliated party receivable that qualifies as an asset under the above provisions and is due within one year of the reporting date may be treated as a current asset. Any portion of an affiliated party receivable that qualifies as an asset under the above provisions and is due within ninety days of the reporting date may be counted as a quick asset.

    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. However, to the extent that an affiliated party receivable from the parent is excluded by the preceding sentence, it may be included in net worth provided that the parent is a publicly-traded company as of its last quarter ended, with a current ratio of at least 1.1 and a net worth of at least 10% of its total liabilities. As an alternative to complying with the 33% limitation, an accredited PEO may present audited consolidated financial statements in which the affiliated party(s) financial statements are consolidated with those of the accredited PEO, if such consolidation is otherwise permitted under generally accepted accounting principles. In such case, the consolidated entities must meet ESAC financial standards on a consolidated basis. Each non-PEO entity must execute a cross guaranty agreement in a form acceptable to ESAC guaranteeing the liabilities of each PEO entity included in the consolidated financials and each PEO entity must execute a cross guaranty agreement in a form acceptable to ESAC guaranteeing the liabilities of all other PEO entities included in the consolidated financials. All PEO entities included in the consolidated group of companies must be accredited.

    Effective July 1, 2006, the following transition rules shall apply and when such transition rules are no longer applicable shall be deleted from these standards without further action:

    • To provide an initial transition period for implementing this standard, affiliated party receivables otherwise excluded will be excluded for purposes of meeting ESAC’s financial standards based on the following schedule: 25% shall be excluded as of the effective date of this standard (October 1, 2006), 50% shall be excluded at the first-year anniversary of the effective date, 75% shall be excluded at the second-year anniversary of the effective date and 100% shall be excluded at the third-year anniversary of the effective date.

    • On or before September 30, 2006, an accredited PEO may convert an affiliated trade receivable into a loan receivable, in which case the date of original advance shall be the date the affiliated trade receivable is converted to a loan receivable. After September 30, 2006, an affiliated trade receivable shall not be treated as a current asset for purposes of meeting ESAC’s financial standards unless such receivable complies with the requirements of 1, above.
  8. For purposes of meeting ESAC Adjusted Net Worth and financial liquidity standards as specified in Financial Standards #2 and #3, a Captive that insures any risk of an accredited PEO must be audited at least annually and a copy of the audited statements provided to ESAC as part of the PEO’s annual submittal of audited financial statements.

    The financial condition of the Captive shall be considered by ESAC for purposes of determining the adequacy of recorded liabilities of the accredited PEO and for calculating Adjusted Net Worth and Current and Quick Ratios. Such consideration may include, without limitation, whether the Captive has sufficient assets and cash flow to pay its liabilities, including claims attributable to the accredited PEO, in the ordinary course of its business as such liabilities become due and payable, such that the Ultimate Liability with respect to claims attributable to the accredited PEO can be satisfied from: (i) the assets and cash flow of the Captive available for such claims, and (ii) the recorded liability of the accredited PEO. Such consideration may also include the potential liability of affiliates of the accredited PEO with respect to the Captive and the effect of such potential liability on any assets of the accredited PEO, including receivables from such affiliate.

    In connection with the submission of its audited financial statements, an accredited PEO, any of whose risk is insured through a Captive, shall clearly identify and tie back to such audited financials and the audited financial statements of the Captive the PEO’s Ultimate Liability with respect to the risk insured through the Captive as of the reporting date and shall identify the amount and location of such liability included in the PEO’s balance sheet.

    A Captive that insures any risk of an accredited PEO must be domiciled in and subject to the regulation of an approved jurisdiction, as evidenced by the listing of approved jurisdictions for Captives as maintained on the ESAC website. An accredited PEO that desires to utilize a Captive not domiciled in and subject to the regulation of an approved jurisdiction
    may utilize 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 its sole discretion.
  9. An ESAC-accredited PEO shall pay in a timely and accurate manner all wages, payroll taxes, employee benefit contributions, and workers’ compensation and group insurance premiums for all plans of insurance sponsored or co-sponsored by the PEO.
  10. An ESAC-accredited PEO must carry the following minimum amounts of insurance coverage: View Insurance Coverage Table
  11. A 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.
  12. Each Affiliated PEO of a PEO Group must submit a cross guaranty of all the obligations of each other Affiliated PEO in the Group, executed in favor of the clients, worksite employees, insurers, and taxing authorities thereof.
  13. Audited financial statements must be prepared and audited by an independent CPA, who is a member of the AICPA and who has an unmodified report from the most recent peer review by the AICPA Peer Review Board, in a form and manner that fairly represent the financial condition of the PEO in accordance with general accepted accounting principles and shall include a balance sheet, statements of income, equity and cash flows, including all schedules and footnotes pertaining thereto.