The 401(k)-retirement account continues to evolve, with a recent IRS ruling allowing employees the power to choose how to allocate their company’s contributions.

The ruling would allow employees to designate a portion of their company’s match to go towards their 401(k), health reimbursement accounts or student-loan repayments.

The ruling applies only to one company that made the request, but some advisers said this could open the door to more flexibility in 401(k) accounts across the board.

“This is so exciting,” said Emily Irwin, head of advice at Wells Fargo Bank. “This is so innovative and interesting from the employer and employee perspective. It’s putting all the control into employee hands with a baked-in default towards retirement.”

What does the ruling allow?

The so-called private letter ruling allows workers at one unnamed company to choose at the beginning of each year where they want their company’s 401(k) retirement match to go. They can apply the money to the employees’ retirement plan, health savings account, student-loan repayment, a retiree health-reimbursement arrangement, or possibly a combination of those options. If no choice is made, funds would automatically go into the worker’s retirement account. Employees wouldn’t be able to take the money in cash.

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If other companies want to implement a similar flexible program, they’d have to make their own requests to the IRS.

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Why do people care about private letter rulings?

Private letter rulings can provide insight into future benefits trends. For example, a provision in the SECURE 2.0 Act allowing employers to match student loan payments by employees with contributions to their retirement accounts started as a private letter ruling for Abbott Laboratories in 2018.

Experts warn, however, that not all private letter rulings become law, and if they do, they can still go through many evolutions first.

“It’s an innovative step in the right direction, but there’s still a long road ahead of us,” Irwin said.

Is a flexible company match option good for employees?

Flexibility on how to use a company match meets workers where they are, experts said.

“People can look at their balance sheet, income levels, and choose where they want to put the money based on where they are in life,” Irwin said.

It may be beneficial “to 2-4% of people drowning in student debt or medical debt, but not the vast majority of people,” said Steven Conners, founder and president of Conners Wealth Management. “I would be surprised if the vast majority of people were drowning in student or medical debt.”

Are there drawbacks for workers?

If employees allocate their company match to priorities other than retirement, they lose the power of compounding. Compounding is when an asset’s earnings are reinvested to generate additional earnings over time and multiply your initial investment exponentially.

“The only negative I can see is the idea of losing ability to compound early on,” Irwin said. “You’re making a decision to take dollars that you otherwise would invest and presumably grow, to go to something else.”

That’s why it’s imperative that people who decide to shift money towards health care reimbursements or student debt return to the retirement fund default as quickly as possible, Conners said.

“You don’t want a good thing to turn into a bad thing,” he said. “If this opens a small door for those who struggle with healthcare or student debt to get some relief, then it’s a good thing. However, keep that door small, a side gate. Don’t lose sight of the front door, which is where you want to go to walk inside the house and into retirement without any limitations.”

Another unexpected benefit can be employees becoming more knowledgable about their finances. “Employees now have to educate themselves to understand where the best place is to put their money,” Irwin said. “But that pushes employees to think about what I’m doing with my money. There’s a little bit more responsibility for them to decide, and it forces everyone to get educated.”

Does offering company match flexibility help employers?

From a recruiting standpoint, probably yes, experts said.

“Employees like optionality and if this is unique to this company, it can only be a good thing as a benefit for recruiting,” Irwin said.

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and  subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning. 

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