"how to you proceed when the PEO responsible for processing payroll isn't on board?"

It's a case of TMI. It's none of their judgement if you pay the CEO $60,000 (which needs to be the "going rate" within the qualification of "Reasonable Compensation") and then, at year end, there is declared a distributable bonus of another $60,000 (because the person took this other $60,000 as "advance"). That would be the addition to the final paycheck. The issue is that there also needs to be indication of Employee Loan Repayment on that paycheck, which again, I don't see why the PEO has the right to enforce that you cannot do it that way. Or, let that employee get the "take home" and then turn it over to the company the same as a real loan advance and repayment would be done.

A compensation plan can include advances against commissions, for instance, such as sales (large equipment, appliances or furniture). A sales person might get a base rate or salary + commission that is not settled until quarterly or seasonally. In the meantime, the sales person takes a draw or advance against commission. The PEO doesn't set nor enforce your compensation program. They are your service provider and you are their customer; they are not supervising you.

Let's look at the other perspective: when the Sole Proprietor asks to be paid through payroll with withholding, and the service provider does not prevent this. The responsible party for policy is not the PEO.