In recognition of employees’ diverse financial needs and objectives, the Internal Revenue Service (IRS) recently green-lit a new type of plan design that allows employees to direct employer contributions as needed.

Background of the 2024 IRS PLR

A recent private letter ruling (PLR 202434006) issued by the IRS approved a new type of benefit design, offering employees the ability to choose where employer contributions would be allocated annually. The funds could be directed to the employee’s:

• Defined contribution (DC) plan account as a non-matching contribution
• Health savings account (HSA) up to statutory limits ($4,300 for individuals and $8,550 for families in 2025) or a retiree health reimbursement arrangement (HRA)
• Student loan reimbursements through a Section 127 educational assistance plan (up to an annual limit of $5,250)

Employees would not have the right to receive the funds as cash. This limitation side-steps the cash or deferred rules and is not structured as a matching contribution, which would fall afoul of the contingent benefit rule. These funds, when contributed to the DC plan, would not count toward the deferral or matching contribution limits or related non-discrimination tests.

With respect to the HSA and HRA, the contribution would be excluded from the employee’s gross income provided it does not exceed the applicable contribution limits. The student loan assistance program via IRC section 127 faces the most uncertainty, as the student loan repayment program was introduced in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and is currently set to expire after 2025, unless extended by Congress. A bipartisan, bicameral bill was recently introduced extending the tax-free student loan repayment benefit permanently, although it still has to make its way through the legislative process.

Employers will need to consider managing limits, directing investments, vesting, portability, and other factors. The employer in the private letter ruling (PLR) included safeguards. For example, employees who elect to have the employer contribution go into the HSA are not eligible to make pre-tax payroll contributions to the HSA until after March 15, when the choice contribution is funded. Allowing employees to elect where the employer contribution is directed adds complexity to plan administration between multiple vendors.

Bottom Line

The IRS’s approval of this new flexible choice design empowers employees to direct employer contributions as needed for their own personal circumstances—between saving for retirement, paying down student loans, or saving for health care expenses. Note that a PLR can only be relied on by the plan sponsor that requested it. Employers interested in pursuing a similar choice program may wish to seek their own PLR.