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IRS gives company its blessing for employees to opt-in to 401(k).

IRS gives company its blessing for employees to opt-in to 401(k).

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The 401(k) retirement account is evolving, and a recent IRS ruling gives employees the power to decide how they use their company’s contributions.

The ruling would allow employees to direct a portion of their company’s revenue toward their 401(k), health reimbursement accounts or student loan repayment.

The ruling only applies to a company that submitted the application. 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 advisory at Wells Fargo Bank. “This is so innovative and interesting from an employer and employee perspective. It means putting all control in the hands of employees, with a built-in insolvency when it comes to retirement.”

What does the verdict allow?

The so-called private letter rule allows employees of an unnamed company to decide at the beginning of each year where their company’s 401(k) retirement deduction should go. You can apply the money to employee retirement plans, health savings accounts, student loan repayments, a retiree health plan, etc. or possibly a combination of these options. If no election is made, the funds will automatically be transferred to the employee’s retirement account. Employees could not accept the money in cash.

If other companies wish to implement a similarly flexible program, they must submit their own applications to the IRS.

Employee participation and taxes: Roth 401(k) employer matches may trigger a tax charge for you. Here’s what you need to know:

Why do people care about private letter decisions?

Private letter decisions can provide insight into future performance trends. For example, a provision in the SECURE 2.0 Act that allows employers to match employees’ student loan payments with contributions to their retirement accounts began as a private letter decision for Abbott Laboratories in 2018.

However, experts warn that not all private letter decisions become law, and if they do, there may be a lot of developments to go through first.

“It’s an innovative step in the right direction, but there’s still a long way to go,” Irwin said.

Is a flexible company match option good for employees?

Experts say the flexibility of using a company match meets workers where they are.

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

It could be beneficial for “the 2-4% of people who are 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 disadvantages for employees?

When employees prioritize their company match other than retirement, they lose the ability to compound. Compounding is the process of reinvesting an asset’s earnings to generate additional income over time, exponentially multiplying your original investment.

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

That’s why it’s imperative that people who decide to shift money toward health insurance reimbursements or student debt return to retirement funds as quickly as possible, Conners said.

“You don’t want something good to turn into something bad,” he said. “If this opens a small door for those struggling with health or student debt to get some relief, then that’s a good thing. However, keep this door small, as a side gate. Don’t lose sight of the front door, because that’s where you want to enter the house and retire without restrictions.”

Another unexpected benefit may be that employees become more knowledgeable about their finances. “Employees now need to educate themselves to understand where best to invest their money,” Irwin said. “But it makes employees think about what I do with my money. It gives them a little more decision-making responsibility and it forces everyone to educate themselves.”

Does it help employers to offer flexibility in company customization?

From a recruiting perspective, probably yes, experts say.

“Employees value the opportunity to be optional, and if this is unique to that company, it can only be beneficial for recruiting,” Irwin said.

Medora Lee is a money, markets and personal finance reporter for USA TODAY. Reach her at [email protected] and sign up for our free Daily Money newsletter every Monday through Friday morning for personal finance tips and business news.