Recent IRS guidance confirms that employers may let employees choose how to use discretionary employer contributions such as reducing a discretionary 401(k) contribution and redirecting it to one of several benefit options, including:
- The 401(k) plan;
- The retiree health reimbursement arrangement;
- The educational assistance program (solely for qualified student loan payments); or
- An employee’s health saving account (HSA).
A private letter ruling (PLR) is an IRS response to a specific taxpayer’s request explaining how tax law applies to their situation. While other employers cannot rely on it as formal precedent, it offers valuable insight into how the IRS may view similar programs.
Program Operation
Under PLR’s proposed amendments: employees make a one-time annual election during open enrollment; the employer then contributes by March 15 based on that election (defaulting to the 401(k) if no election is made); and contributions cannot be taken as cash or another taxable benefit.
To avoid exceeding IRS limits, employees who direct contributions to student loan assistance or an HSA cannot receive other benefits from that program or make pre-tax HSA contributions until after March 15.
Implementation Considerations
Employers interested in implementing a similar approach should consider the following steps:
- Consult legal and tax counsel to assess whether a similar design works for your plans and workforce, since this PLR cannot be used as formal precedent.
- Review and update plan documents so 401(k) amendments, summary plan description updates, and cafeteria plan changes are finalized before rollout.
- Assess administrative capacity. Confirm payroll and benefits systems can track elections, coordinate multi-benefit contributions, and enforce statutory limits.
- Develop clear employee communications so staff understand the program terms before open enrollment, including the irrevocable election and any HSA or educational assistance restrictions.
- Consider state tax implications. Confirm how each benefit option is treated under the state’s tax rules, since the PLR only addresses federal tax treatment.
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Links and Resources
- IRS PLR No. 202434006
- IRS Publication 969, which covers HSAs and other tax-favored health plans, including how employer contributions are treated
- IRS FAQs on educational assistance programs
- IRS FAQ on obtaining a PLR
