Employer-match money could go toward more than your 401(k) after this IRS ruling

September 30

A private letter ruling from the IRS is a starting point for more employee-choice in benefits, experts said. – Getty Images/iStockphoto

A new IRS ruling could ultimately give employees more power to choose how their employer match is contributed to their benefits — such as adding to their 401(k), health savings accounts or helping with student-loan repayments.

While the ruling currently applies to only one company, experts called it significant and expect it to open the path toward wider use in the future.

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Under the private-letter ruling, at the beginning of each year, workers can choose where their employer contributions will be applied. Employees can’t get the funds in cash, but they have a choice of where their employer’s money goes.

“This innovative program allows plan sponsors to more effectively respond to the diverse financial worries of employees by letting individuals direct employer dollars where they need them the most,” said Chris West, managing director and head of the defined contribution strategy team at WTW, which helps clients manage benefits and provides insurance brokerage and advisory services.

“For employers, moving away from ‘one size’ benefits can open a competitive advantage in their ongoing battle to attract and retain talented workers. For employees, it gives options on how best to use employer dollars based on their needs and life stage, including paying down student loans,” West said.

Employees can choose from these four areas for the contributions: the employees’ retirement plan, their health savings account, student-loan repayment or a retiree health-reimbursement arrangement. If no choice is made, funds would automatically go into the worker’s retirement account.

“Employees like control. They like to feel in control of their future. This turbocharges employee benefits,” said Kevin Crain, executive director of the Institutional Retirement Income Council. “This gives a sense of control for the employee and lets them determine where money goes for what stage of life they are in.”

The private-letter ruling only applies to the unnamed company that requested it. Other employers interested in pursuing a similar choice program would need to seek their own ruling. WTW, which served as a strategic adviser to the company that requested the IRS ruling, is talking with other clients about pursuing a flexible-choice program, West said.

“The narrow ruling is a start and that starts the momentum. This is a very positive evolution. It’s very significant,” Crain said.

Crain said several other employee benefits that are now universally available started as narrow, private-letter rulings.

For example, a provision in the SECURE 2.0 Act — which permits employers to match any payments their employees make toward their student-loan balances with contributions to their retirement accounts — started as a narrow letter ruling with Abbott Laboratories ABT in 2018, Crain said.

Crain said it could take five to 10 years for the practice of employee-directed choice to become widely available among companies, but the door has now opened for more worker control and choice over benefits.

“This is the important, next generation of financial wellness for employees,” Crain said.