IRS Opens Door for 401(k) Matching to Pay Student Loans

A groundbreaking IRS private letter ruling just opened up possibilities that could transform how your employees think about their benefits package. Instead of forcing all 401(k) matching contributions into retirement accounts, the IRS is now allowing companies to let workers direct those employer dollars toward immediate financial needs like student loan payments or healthcare expenses.

What Changed

The IRS issued a private letter ruling allowing an unnamed company to offer employees a choice: take the traditional employer 401(k) match for retirement savings, or redirect those same dollars to help pay down student loans or cover healthcare costs through a Health Reimbursement Arrangement (HRA). Employees can make this election annually, giving them flexibility to adapt their benefits to their current financial priorities. While this ruling technically applies only to the requesting company, it signals the IRS's willingness to approve similar arrangements for other employers.

Who This Affects

Any New York employer offering 401(k) matching could potentially implement this type of flexible benefits structure. This is especially valuable for businesses struggling to attract younger workers drowning in student debt, or companies with employees facing high healthcare costs. Small and medium-sized businesses in competitive hiring markets - think tech startups in NYC, healthcare practices, or professional services firms - could use this as a significant recruitment and retention tool. The flexibility appeals across age groups: younger employees might prioritize student loan relief, while older workers with health issues might prefer healthcare cost assistance.

What You Need to Do

• Request your own private letter ruling from the IRS if you want to implement this structure - each company needs individual approval
• Work with your 401(k) provider and benefits administrator to determine if they can support this type of flexible allocation system
• Review your current plan documents and employee communications to understand what changes would be needed
• Survey your employees to gauge interest and determine which options would provide the most value

The NY Angle

New York employers need to consider how this flexibility interacts with state-specific benefit requirements. While the IRS ruling doesn't conflict with New York's Paid Family Leave or Disability Benefits Law, you'll want to ensure that any healthcare cost reimbursements through an HRA don't inadvertently affect employees' eligibility for state benefits. Additionally, ACA reporting requirements we've discussed before will still apply to any healthcare-related benefits you offer. New York's high cost of living makes both student debt relief and healthcare cost assistance particularly attractive to employees, potentially giving forward-thinking employers a competitive edge in the tight labor market.

Need help navigating this? Benton Oakfield's compliance team works with businesses like yours every day. We can review your current setup and make sure you're covered. Reach out - it's what we do.

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