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On August 23, 2024, IRS released a Private Letter Ruling (PLR) “approving” an arrangement under which a sponsor allows employees to choose to have an employer contribution allocated between a 401(k) plan, a health reimbursement arrangement, a health savings account, and an educational assistance program (providing for, among other things, student loan repayments). In this article we review the PLR and consider its significance for sponsors interested in this sort of program.
What is a PLR?
A Private Letter Ruling is a ruling by the IRS applying (their view of) the Tax Code to a specific set of facts with respect to a specific taxpayer. It may only be relied upon by that taxpayer, and only with respect to the facts set forth in that taxpayer’s ruling request. Nevertheless, a PLR may provide insight into IRS’s thinking with regard to issues as to which it has taken no formal legal position.
Factual background
In this case, the taxpayer provides four separate benefit programs with respect to which a ruling is requested:
401(k) plan. The 401(k) plan provides for employee elective deferrals and two types of employer contributions: safe harbor non-elective contributions; and “a discretionary employer contribution” that is allocated to all participants with at least one year of service who are employed at the end of the year and is subject to a 6-year graded vesting schedule.
Retiree HRA. The sponsor makes contributions to a retiree health reimbursement arrangement (HRA) during employment that are credited with interest. “[A}mounts in the Retiree HRA may only be used to provide benefits that reimburse medical expenses under [Tax Code] section 213(d) … and employees may not receive the value of the HRA account in cash.” Unused amounts are carried forward. At death unused amounts are paid to the participant’s surviving spouse or eligible dependents, or (if there are none) forfeited.
HSA. The sponsor provides a health savings account (HSA) to which eligible employees may make contributions and on which the sponsor will make matching contributions.
EAP. The sponsor provides an educational assistance program (EAP) that “reimburses full-time employees certain education expenses taken for academic credit.” The sponsor is proposing to amend this program “to [among other things] provide student loan payments if an employee allocates the Employer Contribution to the Educational Assistance Program.” [Note that the exclusion from income of student loan repayments under an EAP is set to expire on December 31, 2025.]
Proposal to allow allocation of employer discretionary contribution between these four benefit plans/programs at the employee’s election
The sponsor is proposing to reduce its 401(k) plan discretionary contribution and “to provide eligible employees with a choice 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, “[e]mployees 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.”
IRS’s ruling Oversimplifying somewhat, IRS ruled that the “additional discretionary contribution” would not be treated as an employee 401(k) elective deferral. And that 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 sponsors
The critical innovations in this program are the ability to allocate between a tax-qualified retirement plan and non-retirement tax-favored benefits and the EAP student loan repayment feature. As noted – the latter is set to expire at the end of 2025.
Generally, the features that make this program work (under the Tax Code) are: (1) the employee’s inability to receive the additional discretionary contribution in cash; (2) the employee election being irrevocably made in the year prior to the allocation of the benefit; and (3) the non-taxability of the four allocation alternatives.
Some of the plans in question here are likely subject to at least one form of nondiscrimination testing. As the PLR provides no relief from the existing rules, it would seem that each plan that does require testing will need to pass those tests after consideration of the irrevocable elections made, and, in fact, after contributions have actually been allocated. This could present challenges for some employers.
As noted – only the taxpayer requesting this ruling is entitled to rely on it. Sponsors considering adopting a similar program would have to apply for their own PLR.
We’ve have elided a number of technical issues – sponsors considering adopting a similar program will want to review it thoroughly with counsel.
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We will continue to follow this issue.