The Internal Revenue Service (“IRS Approves Employee Choice Among Several Benefit Plans for Employer Contributions

The Internal Revenue Service (“IRS”), in Private Letter Ruling 202434006 (“PLR”) (released on August 23, 2024), approved an employer’s program that gave employees the option to elect new cafeteria plan options for their contribution dollars. The new contribution scheme offered employees flexibility in deciding how much of their employer’s benefit plan contributions could be allocated across several different plans options, such as a 401(k)s or other defined contribution plans, health reimbursement arrangements (“HRAs”), health savings accounts (“HSAs”), and the employer’s contribution to the employee’s medical plan selection. 

Note that IRS Private Letter Rulings do not constitute binding legal or regulatory advice and may be relied upon solely by the requesting employer so caution should be exercised by employers looking to install such flexibilities at this time. However, this PLR may pave the way for employers to offer their employees similar flexibility in allocating employer contributions among a wider variety of benefits.  Additionally, future rulemaking is anticipated by the IRS on this topic. 

Employer Action Items

• Employers and plan sponsors interested in this type of contributory scheme should start discussions with their tax and legal professionals for professional consultation regarding the practical, legal, and tax issues involved in implementing this sort of program.
• Employers and plan sponsors should start discussions with their defined contribution vendors and their health plan carriers, contemplating whether they are developing products and administrative solutions able to accommodate such elective flexibilities.  

Summary

According to the IRS, the specific employer-taxpayer’s program presented in the PLR gave eligible employees the ability to make an annual and irrevocable allocation of funds elections when they were first eligible (or at open enrollment). In the PLR, the IRS restricted flexible contribution plans to those arrangements wherein employers already have the ability to make contributions. In other words, plans such as flexible spending accounts (“FSAs”) and dependent care assistance programs (“DCAPs”) are not eligible for employer contributions; thus, those plans are not eligible. Eligible plans include:

• The employer’s 401(k) plan;
• The employer’s retiree health reimbursement arrangement (“Retiree HRA”) (provided the employee is age 55 or older and has at least 10 years of service at the time of the election);
• An employer’s educational/tuition assistance program when the payments are only for the purpose of paying the student’s educational loan payments; or
• An employee’s HSA for enrollees assuming the employee is on a high deductible health plan (“HDHP”) and are HSA-eligible.

To be eligible for the employer’s contribution, employees must have completed one year of service and must be employed on the last day of the plan year (subject to certain exceptions). The program dictates that employees are not permitted to receive the employer’s contribution in the form of cash or as any taxable benefit.

In the proposed program described in the PLR, if no elections or allocations were selected by eligible employees, 100% of the employer’s contribution would be made to the employer’s 401(k) plan by March 15 of the following year. If the employee made elections or allocations, the money would be treated as a contribution for the following year for the 401(k), the HSA, and/or the education assistance program.  Contributions allocated to the retiree HRA would be treated as contributions effective as of December 31^st of the current year.

Additional Resources

• IRS Private Letter 202434006