A recent IRS ruling that applies to one company could open the door for millions of workers to decide exactly where their employer retirement contributions end up.
The ruling gives employees at one company the ability to earmark these contributions for one of four things:
- 401(k) plan
- Health savings account
- Retiree health-reimbursement arrangement
- Student loan payments
Employees at the company who do not specifically designate where the money should go will see it funneled into their retirement account as a default. Workers cannot receive contributions in cash or as another taxable benefit.
The company in question was not identified in the IRS private-letter ruling. But similar rulings now could be made for other companies at some point in the future.
As things stand today, other companies interested in a similar arrangement would need to reach out to the IRS in hopes of getting their own individual ruling.
Willis Towers Watson — a company that helps clients manage benefits and offers insurance brokerage and advisory services — worked with the unidentified company that requested the recent ruling.
Chris West, defined contribution strategy leader at WTW, told the publication Plansponsor that employees at the unnamed company will have the option of dividing up the nonelective employer contribution how they choose. For example, they could ask for one portion of the employer contribution to go to their 401(k) and another portion to go to their student loan balance.
Employees will make such elections during the open enrollment process.
West told Plansponsor:
“We believe that this [ruling] is really groundbreaking, because it is about flexibility and choice. This employer has received approval to do that, so down the road if other employers want to do the same thing or a version of it, the flexibility and choice is there. They just need to figure out what their ultimate design would look like.”
WTW says other companies have contacted it about seeking similar permission from the IRS to offer such so-called employee-directed choice options.
Kevin Crain, executive director of the Institutional Retirement Income Council, told MarketWatch that he expects the practice of employee-directed choice to become more widespread at companies over the next five or 10 years.
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