Small Employer Weighing a Cash Allowance Against Group Medical
Northline Machine has 30 full-time employees, 8 part-time employees averaging 25 hours per week, and 4 seasonal workers who work about 5 months a year. It sponsors a fully insured group medical plan for full-time employees after a 60-day waiting period. The owner wants to terminate the group plan, give every employee $400 per month in cash, and let them buy ACA marketplace coverage. Two long-tenured machinists ask whether they can take the cash instead of the plan and keep their current doctors. The employer is in a state with no individual mandate and no state employer mandate.
1. Is Northline an applicable large employer for the ACA employer shared responsibility rules? Show the count and explain what follows if the group plan is terminated.
Read the worked answer
Full-time count (30 hours/week = 1.0): 30.
Part-time FTEs: 8 × 25 hours × 52 weeks = 10,400 hours ÷ 2,080 = 5.0.
Seasonal: 4 × 40 hours × ~22 weeks ≈ 3,520 hours ÷ 2,080 ≈ 1.7. Seasonal workers at 120 days or fewer are excluded from the ALE count in any event.
Total ≈ 36.7 FTEs - well under 50, so Northline is not an ALE. That means no §4980H(a) or (b) assessable payments and no 1095-C reporting obligation on that basis.
But three things still bite if the plan terminates:
- COBRA. Northline had 20+ employees in the prior year, so it is a COBRA employer. Terminating the plan is a qualifying event requiring timely notices; failing to send them is a real exposure, and penalties are per participant per day.
- The 90-day waiting period rule applies to non-grandfathered group health plans regardless of size, so the 60-day wait is fine but cannot be stretched if they keep a plan.
- State law. Even without a state mandate, the state may regulate the fully insured plan's termination notice and continuation rules.
2. The two machinists want cash instead of the plan. Can the employer do that for them, and what are the tax and subsidy consequences?
Read the worked answer
Yes, but only through a cafeteria plan if it is to be pre-tax. A §125 plan can offer a choice between employer-provided coverage and taxable cash. Outside a §125 plan, the $400 is simply wages - reported on the W-2 and subject to FICA.
Discrimination testing. A cash-in-lieu option is a §125 contribution/benefit subject to the nondiscrimination rules. If the option is offered only to highly compensated or key employees, the plan fails the concentration test and the HCEs lose the exclusion. The two machinists are not HCEs, so the immediate case is clean provided the option is offered on the same terms to a nondiscriminatory group.
Subsidy consequence is the big one. If they take the cash and buy marketplace coverage, they are not offered an eligible employer plan and may qualify for premium tax credits based on household income. If the plan remains and is affordable and minimum value, they get nothing - but it is still often a worse deal to leave.
What the employer must not do: simply raise salaries and reimburse individual premiums. An arrangement that reimburses individual market premiums is an employer payment plan that violates the ACA market reforms (with the narrow exception of a properly structured QSEHRA or ICHRA).
3. The owner wants to drop the group plan entirely. Compare the cash-allowance approach to an ICHRA for this workforce, including what happens to the machinists' ability to keep their physicians.
Read the worked answer
Cash allowance: simple, no plan administration, no ERISA plan. But it is taxable wages, employees buy unsubsidized or subsidized individual coverage on their own, and the employer has no compliance infrastructure. Employees with modest incomes may actually do well because premium tax credits are based on income net of the allowance... except that a straight raise increases household income and shrinks the credit.
ICHRA: the employer sets a defined contribution, and employees who enroll in individual market coverage get the allowance tax-free; the ICHRA satisfies the employer mandate affordability test for ALEs (Northline is not one, but the mechanics still help). Employees can opt out, forgo the allowance, and claim premium tax credits if the ICHRA coverage is not affordable.
Keeping the doctors is the deciding fact. Moving to individual market coverage means the network is whatever the exchange plan offers - the two machinists' current physicians may not be in it, and the group PPO's broad network disappears. Neither a cash allowance nor an ICHRA preserves the current plan's provider panel.
Recommendation logic: if the goal is cost certainty, an ICHRA plus a defined allowance is cleaner and tax-advantaged. If continuity of care is the priority for the tenured machinists, the honest answer is that terminating the group plan cannot deliver it, and the employer should consider keeping a narrowed group plan (for example, a lower-cost network or an HDHP with an HSA) rather than a cash conversion. Any change requires 60 days' notice and a COBRA election window.