IRS signs off on employer's matching contribution allocation proposal, outside the 401(k) plan

An Internal Revenue Service official has blessed an arrangement that will let workers allocate their employer’s annual retirement plan matching contribution to any one of four different accounts.

The workers will be able to send some or all of the employer’s contribution to a 401(k) account, a health savings account, an educational assistance program account or a retiree health reimbursement arrangement, according to a new IRS private letter ruling signed by Denise Trujillo, the Health & Welfare branch chief at the IRS Office of Associate Chief Counsel.

The heart of Trujillo’s letter is a passage concerning the tax treatment of matching contribution value sent outside the 401(k) plan.

“The proposed amendments do not permit employees to elect between having the employer contribution paid in cash (or some other taxable benefit) or contributing it to a plan deferring the receipt of compensation,” Trujillo writes.

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Because the employees cannot convert the matching contributions into cash, the arrangement would not cause the 401(k) plan to “offer an additional cash or deferred arrangement,” Trujillo says.

Private letter rulings

The IRS uses the private letter rulings to give taxpayers informal guidance about how it interprets the tax rules.

Other employers cannot rely on the interpretation given in a letter provided for one particular taxpayer, but employers and their tax advisors can use private letter rulings to get a good sense of how the IRS sees an issue.

Plan details

The new IRS letter does not name the employer that asked for the ruling, and it does not specify the size of the matching contribution or most of the numerical parameters for the HSA and retiree HRA programs.

The amounts in the “retiree HRA may only be used to provide benefits” that qualify as reimbursable medical expenses under section 213(d) of the Internal Revenue Code, and “employees may not receive the value of the HRA account in cash,” Trujillo writes.

Employees using the educational assistance program can exclude up to $5,250 in college expense reimbursement from their taxable income.

What it means

The new letter ruling appears to be much more elaborate than other matching contribution allocation letter rulings, and it also deals with a type of account, the retiree HRA, that has not been mentioned very often in letter rulings.

The unusual nature of the new ruling could lead to other benefits designers using it as a template for other multi-account funding arrangements.