IRS Permits Flexible Allocation of Employer Contributions Across Benefits

1.5 minute read

The IRS has issued a private letter ruling (No. 202434006) that approves an employer's program allowing employees to allocate employer contributions to various benefits. A Private letter ruling (PLR) provides insights into IRS interpretations of similar programs, though it can't be used as precedent by others.

Program Details

The IRS has approved a reduction in the employer's discretionary 401(k) contributions, allowing eligible employees with a choice to allocate additional contributions to one of the following:

• The 401(k) plan;
• The retiree health reimbursement arrangement (HRA) (for those 55+ with 10 years of service);
• The educational assistance program for student loans; or
• An employee’s health savings account (HSA).

Under the proposed amendments:

• Employees choose their benefits annually during open enrollment;
• Employers contribute accordingly by March 15, defaulting to the 401(k) if no choice is made; and
• Contributions cannot be received as cash or taxable benefits.

Employees choosing employer contributions for educational assistance or HSA must wait until after March 15 of the following year to access other benefits or make pre-tax HSA contributions, ensuring compliance with statutory limits.

Action Steps

The IRS PLR could enable more employers to offer flexible allocation of contributions across various benefits. Allowing employees to choose how employer contributions are allocated, such as retirement, student loans, or healthcare, can enhance attraction and retention. Employers should consult benefits counsel and consider obtaining their own PLR to ensure compliance. Download the bulletin for more details.