IRS approves ‘employee choice’ program, in private letter ruling: Willis Towers Watson

Willis Towers Watson says it helped an employer get the recent Internal Revenue Service ruling approving a new type of “employee choice” benefits program.

The ruling gave the employer that asked for it a way to let employees allocate the employer’s cash contribution to four different types of arrangements: a defined contribution retirement plan, a health savings account, a retiree health reimbursement arrangement and a student loan reimbursement arrangement that’s part of an educational assistance program.

Related: How prepared are your employees for health care expenses in retirement?

One question the IRS letter ruling raised was: Who asked for the letter ruling? “WTW served as a strategic advisor to the company that requested the groundbreaking IRS ruling and assisted with developing the plan design,” Beth Ashmore and Bill Kalten, two retirement benefits executives at Willis Towers Watson, write in a commentary.

What it means: Like all IRS private letter rulings, the new employee choice plan ruling applies only to the taxpayer that asked for the ruling.

But the ruling is important because it shows employers how they can help workers cope with unexpected medical expenses and student loan debt, Ashmore and Kalten say.

The structure: The Willis Towers Watson client told the IRS its contribution would stay in the four different benefits arrangements.

The employees would not be able to take cash out, and other requirements related to health reimbursement arrangements would be met.

Student loan reimbursement: The federal statute that lets employers provide nontaxable student loan reimbursement expires at the end of 2025. Republicans and Democrats have teamed up to introduce an extension bill in the House and the Senate.

“Although we don’t expect to see the bill move forward this year, its introduction shows that the issue is on Congress’ radar and helps set the stage for the issue to be included in next year’s tax discussions,” Ashmore and Kalten write.

Choice plan concerns: The new program could be complicated to administer, and the fact some of the employer’s contribution would flow away from the defined contribution retirement plan could affect nondiscrimination testing, or efforts to show the IRS that a retirement plan is fair to the ordinary employees.

Another concern could be employee communications.

“Important differences will likely exist between the various options depending on the employer’s design,” Ashmore and Kalten note. “For example, there may be differences in vesting, the ability to self-direct investments, portability and other factors.”

Employers may find ways to reduce the differences, but they will have to find ways to explain the differences that remain.