A recent IRS private letter ruling (PLR 202434006) allows employers to provide their employees with a choice as to how an employer contribution to a benefits program will be used that includes student loan reimbursements. The ruling addressed an employer’s new employee choice plan that allows an eligible employee to make annual elections before the start of each year to direct employer contributions to the employee’s:
- 401(k) defined contribution plan account as an employer contribution
- Health savings account
- Student loan reimbursements through an educational assistance plan
- Retiree health reimbursement arrangement
The plan would not allow employees to receive the employer funds in cash or as a taxable benefit. The PLR does not address the question of whether an employee can have their employer’s contribution split among two or more of the above-listed options, but it also does not bar employees from doing so.
The IRS’s ruling is notable because it allows an educational assistance program to reimburse qualified student loan payments if the plan provides for the reimbursements. The U.S. Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of 2021 amended §127 to permit qualified student loan payments to be reimbursed from an educational assistance program until Jan. 1, 2026.
The unnamed business that requested the PLR asked the IRS whether an employer contribution can be contributed to the four options listed above without jeopardizing the plan’s qualified status. The IRS found that when an employee makes an irrevocable election to have employer dollars allocated to the program or programs of their choice prior to the beginning of the plan year, it will not treat them as elective contributions so long as the other rules governing the plans are followed.
While PLRs are generally considered to show the IRS’s thinking on an issue, only the taxpayer who requests the ruling can rely on it. It is recommended that any employers considering setting up a similar employee choice plan seek the approval of the IRS before doing so to reduce the risk of the agency finding fault with their plan.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.