IRS PLR Allows Contribution Choice Among 401(k) and Other Benefit Arrangements

On August 23, 2024, the IRS released a private letter ruling (PLR202434006) found no fault with an arrangement under which a sponsor allows employees to choose to have an employer contribution allocated among four employee benefit accounts it offers:

• A 401(k) plan, a health reimbursement arrangement (HRA),

• A health savings account (HSA), and an

• Educational assistance program (ESA, that, among other things, permits student loan repayments.

A PLR may be relied on only by the taxpayer who requested it and cannot be cited as authority or precedent by another taxpayer. Nevertheless, a PLR may provide insight into the IRS’s thinking on a particular issue.

The proposal

In general, the sponsor is proposing to reduce its 401(k) plan discretionary contribution and allow eligible employees to make an annual irrevocable election to allocate an additional employer contribution, presumably funded out of the reduction to the 401(k) discretionary contribution, among the four benefit plans/programs described above [401(k), HRA, HSA, and EAP]. Critically, “… employees would not be permitted to receive the (additional employer contribution) in the form of cash or as a taxable benefit.”

Employees “… would make the annual irrevocable election during open enrollment. [The sponsor] would make the Employer Contribution in accordance with the employee’s election (or if no election has been made, the Employer Contribution would be made to the 401(k) Plan) by March 15 of the following year.”

The IRS’s ruling

The IRS ruled the “additional discretionary contribution” would not be treated as an employee 401(k) elective deferral. Furthermore, the election by the employee to allocate the additional discretionary contribution between the four programs will not affect the favorable tax treatment of those programs.

Takeaways for plan sponsors

• Generally, the features making this program work (under the Tax Code) are:

  • The employee’s inability to receive the additional discretionary contribution in cash;

  • The employee election being irrevocably made in the year prior to the allocation of the benefit; and

  • The nontaxability of the four allocation alternatives.

• Nondiscrimination testing would apply, ostensibly; however, the PLR does not address the topic.

• Any plan sponsor considering adopting a similar program will want to discuss the option with their own legal counsel and consider applying for a PLR.

Sources

(2024, August 23). IRS Number: 202434006 Letter. IRS. https://www.irs.gov/pub/irs-wd/202434006.pdf