IRS May Allow Employees to Allocate Employer Retirement Plan Contributions to Other Benefits

In a recent Private Letter Ruling (PLR) from the IRS, an interesting optional approach to allow an employee to direct their employer contributions to a qualified retirement plan such as a 401(k) profit-sharing plan. This development opens the door to some possibilities for employers looking to expand their benefit offerings without increasing costs.

How the Conversation Started

An employer asked the IRS if, instead of making an employer contribution to its profit-sharing plan, employees could choose other nontaxable benefits for those dollars. In the PLR, the benefits the IRS allowed a choice between the following benefits:

  • The 401(k) plan;
  • A Retiree Health Reimbursement Arrangement (HRA);
  • The employee’s HSA account; or
  • An Educational Assistance Program to pay off student loans.

Remarkably, the IRS agreed to these four choices for an employer contribution, which otherwise would have only been made to the 401(k) plan. It did come with some caveats however.

  • Employees would have to make an irrevocable election for the upcoming plan year prior to the start of the plan year.
  • Employees cannot take taxable cash as an option, nor any other taxable benefit instead of the employer contribution.
  • If an employer offered the choice of taking the contribution in the Retiree HRA, it can only be a retiree plan, not one for active employees.
  • If an employer offered an HSA choice, the employee has to be enrolled in a qualifying High Deductible Health Plan (HDHP), and only an HDHP. Also, the contribution would be subject to that year’s annual legal limit. For 2025, that limit is $4,300 for an individual, $8,550 for those enrolled in family coverage. That includes all employer plus employee contributions to the HSA.
  • If an employer offered the Educational Assistance Program to help the employee pay off qualified student loans, the limit for those contributions is currently $5,250. It should also be noted that the provision in the Tax Code in Section 127 that enables employers to provide tax-free student loan repayments will expire at the end of 2025 unless Congress extends it.

Questions About Your Company’s Employee Benefits?

While a PLR technically only applies to the entity requesting it, it does provide us with the IRS’ current thinking on the matter. This is an interesting opportunity for employers to consider offering an option on how employees receive an employer contribution to its qualified retirement plan.