IRS Private Letter Ruling — New flexibility in employee benefit design, a step in the right direction

The IRS has issued a Private Letter Ruling (PLR 202434006) that provides a mechanism for employers to allow employees some level of choice about how to allocate employer contributions amongst various employee benefits. But there are considerations to keep in mind to avoid constructive receipt, such as the election timing and irrevocability. As is the case with most benefit changes, this strategy involves considerable communication and additional administrative tasks and may impact non-discrimination testing. Employers also should keep in mind that PLRs are only binding on the actual recipient.

Here some key takeaways:

Benefit allocation options: Employers choose to design their plans so that employees can allocate their employer contributions to certain accounts, including a defined contribution (DC) plan, a Health Savings Account (HSA), a Health Reimbursement Arrangement (HRA), or tuition and student loan repayments via a Section 127 educational assistance plan.
Non-cash contributions: Contributions must be allocated to these accounts and cannot be taken as cash. This provision helps avoid complications with cash or deferred compensation rules and ensures compliance with non-discrimination tests.
Tax advantages: Contributions to HSAs and HRAs are excluded from employees’ gross income if they stay within statutory limits. Note that the tuition and student loan repayment benefit is set to expire after 2025 unless Congress extends it.
Administrative considerations: Employers will need to navigate the complexities of administering these benefits, including employee communications, management of contribution limits, and timing of employee annual elections. Further, this strategy may impact non-discrimination testing.
Employee perspective: Because employees will be able to choose the benefit area receiving the contribution, it is likely that their appreciation for the amount will increase. However, appreciation could be muted if it is difficult for employees to make their selection. Employers will need to have an easy-to-use interface so workers can see the link the between benefits.

Limitations and considerations

While this PLR provides for some flexibility in allocating a certain type of employer contribution, it’s limited in scope because it applies only to plans that include non-elective 401(k) contributions. Specifically, this PLR excludes matching contributions — a major barrier to creating a more comprehensive "super-flex" benefit design. According to Alight’s 2023 Trends survey, approximately one-quarter of large plans currently offer non-elective contributions.

Additionally, the non-elective contributions must be immediately vested, which increases costs for employers. Half of companies with non-elective contributions already offer immediate vesting, while the other half does not.

As it stands, only about one in eight companies would meet the criteria outlined in the PLR for the flexible benefit structure. Additionally, employers must offer HSAs, HRAs, and/or tuition and student loan repayment programs, so this could further decrease the applicable audience.

It’s important to note that a Private Letter Ruling applies only to the plan sponsor that requested it. Employers interested in offering a similar program should consult their ERISA counsel for guidance and consider seeking their own PLR to ensure compliance with IRS guidelines.