Flexible employer benefit allocation approved

Plain-English summary

An employer proposed letting eligible employees make an annual irrevocable choice to allocate an additional employer contribution among its 401(k) plan, retiree health reimbursement arrangement, health savings account, or educational assistance program for student loan payments. Employees could not take the contribution as cash or another taxable benefit. The IRS ruled that the arrangement would not create an additional cash or deferred arrangement under section 401(k) or make the contribution subject to the section 402(g) elective-deferral limit. It also ruled that qualifying HRA reimbursements, HSA contributions within the section 223 limit, and educational assistance up to the section 127 limit would remain excludable from employees' income. The ruling does not decide whether the programs satisfy applicable nondiscrimination requirements or whether the 401(k) plan is otherwise qualified.

Ruling snapshot

• Question: May employees allocate an employer contribution among four tax-favored benefit programs without losing the stated federal tax treatment?
• Outcome: Approved, subject to each program's eligibility, contribution, and use restrictions
• Key authorities: IRC §§ 105, 106, 127, 223, 401(k), 402(g); Treas. Reg. §§ 1.105-2, 1.127-2, 1.401(k)-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202434006 Third Party Communication: None
Release Date: 8/23/2024 Date of Communication: Not Applicable
Index Number: 105.00-00, 106.00-00,
127.00-00, 223.00-00, Person To Contact:
401.29-00 --------------------, ID No. -----------------
Telephone Number:
--------------------- --------------------
------------------------------------------------------------ Refer Reply To:
---------------- CC:EEE:EB:HW
------------------------------------ PLR-122901-23
--------------------------- Date:
----------------------------------------- May 20, 2024

Legend

Taxpayer = --------------------

Dear ------------:

This letter responds to your letter dated October 26, 2023, supplemented by your
correspondence dated April 3, 2024, requesting a private letter ruling regarding a
proposed amendment to Taxpayer’s 401(k) Plan (“401(k) Plan”), a proposed
amendment to Taxpayer’s retiree health reimbursement arrangement (“Retiree HRA”), a
proposed amendment to Taxpayer’s educational assistance program (“Educational
Assistance Program”), and the proposed allocation by Taxpayer of employer
contributions to an employee’s Health Savings Accounts (“Employee’s HSA”). Taxpayer
proposes to amend these programs to allow eligible employees the choice to allocate
an employer contribution of -- percent of compensation among these programs.

FACTS

401(k) and Profit-Sharing Plan

The 401(k) Plan, a profit-sharing plan with a cash or deferred arrangement, provides for
employee deferrals (as either pre-tax or post-tax (Roth) contributions) and two kinds of
employer contributions.

One employer contribution is a safe harbor non-elective contribution to the 401(k) Plan
equal to -- percent of eligible compensation per pay period. The second employer
contribution is a discretionary employer contribution to the 401(k) Plan (“Discretionary
Contribution”) of -- to --- percent of annual eligible compensation.
PLR-122901-23 2

Employees are eligible for the Discretionary Contribution after the completion of a one-
year period of service. To be eligible to receive the Discretionary Contribution for a plan
year, the employee must be employed on the last day of the plan year subject to certain
exceptions for death, disability, or retirement after a specified age. The Discretionary
Contribution is contributed to the 401(k) Plan on or about March 15 of the year following
the year to which it relates. Employees generally do not have the ability to direct the
investment of their Discretionary Contribution and these contributions are subject to a
six-year graded vesting schedule.

Retiree HRA

Taxpayer provides a Retiree HRA. To be eligible to participate in the Retiree HRA, an
employee must retire at age 55 or older and must have at least 10 years of service.
During employment, Taxpayer makes a notional contribution to employees’ Retiree
HRA accounts each December 31 in the amount of $------- a year for full-time
employees and $------- a year for part-time employees working over 24 hours per week.
Each December 31, Taxpayer also credits each employee’s HRA account balance with
interest based on the 10-year Treasury rate plus -- percent.

At retirement, the employee’s balance is increased by --- percent if the employee is
married. If a participant terminates employment before reaching at least age 55 with 10
years of service, the Retiree HRA account balance is forfeited. The amounts in the
Retiree HRA may only be used to provide benefits that reimburse medical expenses
under section 213(d) of the Internal Revenue Code (“Code”) and employees may not
receive the value of the HRA account in cash. Any unused portion of the maximum
dollar amount available during the coverage period is carried forward to subsequent
periods even after the employee retires (except for any amount forfeited under the
Retiree HRA upon termination of employment as described above).

Upon death after retirement, any remaining available HRA account balance will be
transferred to a surviving spouse or other eligible dependents or if there is no surviving
spouse or other eligible dependent, then the HRA account balance will be forfeited.

Health Savings Account

Taxpayer offers a high deductible health plan (HDHP) within the meaning of section
223(c)(2). Employees who elect the HDHP and who are otherwise eligible individuals
under section 223(c)(1) are eligible to contribute to the Employee’s HSA on a pre-tax
basis through salary reduction to Taxpayer’s section 125 cafeteria plan. Taxpayer also
makes matching employer contributions up to $----- for employees with self-only HDHP
coverage and $-------- for employees with family HDHP coverage. Taxpayer ensures
that the total employee and employer contributions will not exceed the annual
contribution limits under section 223(b).
PLR-122901-23 3

Educational Assistance Program

Taxpayer sponsors an Educational Assistance Program under section 127 that
reimburses full-time employees certain education expenses taken for academic credit.
The maximum annual assistance under the program is $-------- for undergraduate level
courses and $------- for graduate level courses or a combination of undergraduate and
graduate level courses. The Educational Assistance Program also pays the full cost of
certain online undergraduate and graduate degrees and certifications at ---------------------
-------------. For each employee that receives amounts from the Educational Assistance
Program, Taxpayer excludes up to $5,250 each calendar year under section 127.
Benefit payments received by employees from the Educational Assistance Program that
exceed $5,250 are taxed as wages subject to withholding.

Proposed Amendments

Taxpayer currently provides for a Discretionary Contribution to the 401(k) Plan of -- to --
--- percent of annual eligible compensation. Taxpayer proposes to reduce its
Discretionary Contribution to the 401(k) Plan to -- to --- percent of annual eligible
compensation. Taxpayer proposes to provide eligible employees with a choice to make
an annual irrevocable election to allocate an additional employer contribution equal to --
percent of compensation (“Employer Contribution”) (limited to $--------) among the
401(k) Plan, the Retiree HRA (provided the employee is age 55 or older and has 10
years of service at the time of the employee’s election), the Educational Assistance
Program (solely for the purpose of student loan payments under section 127(c)(1)(B)),
or an Employee’s HSA. Employees would not be permitted to receive the Employer
Contribution in the form of cash or as a taxable benefit.

Any amount of the Employer Contribution equal to -- percent of compensation that
exceeds $-------- will not be allocated by an employee but instead will be contributed to
the 401(k) Plan on behalf of the employee and will vest immediately. If an eligible
employee does not make an election, then the Employer Contribution would be
allocated to the 401(k) Plan and would vest immediately.

Under the proposed amendments, eligible employees would make the annual
irrevocable election during open enrollment. Taxpayer would make the Employer
Contribution in accordance with the employee’s election (or if no election has been
made, the Employer Contribution would be made to the 401(k) Plan) by March 15 of the
following year. The Employer Contribution would be treated as a contribution or benefit
payment in the following year for purposes of the 401(k) Plan, an Employee’s HSA, and
the Educational Assistance Program. Contributions made to the Retiree HRA would be
treated as a notional contribution made on December 31 in the same year as the
employee’s election because Taxpayer uses that date to credit interest to the Retiree
HRA.
PLR-122901-23 4

In addition, Taxpayer proposes to amend the Educational Assistance Program under
section 127 to provide student loan payments if an employee allocates the Employer
Contribution to the Educational Assistance Program. This amendment would allow for
student loan payments (through December 31, 2025, unless the provision under section
127(c)(1)(B) that excludes from the gross income of an employee, payment by an
employer of principal or interest on any qualified education loan as defined under
section 221(d)(1) is extended) from the Educational Assistance Program. The
Educational Assistance Program would make the student loan payments directly to the
lender.

The proposed plan amendments would also provide that employees who elect to have
the Employer Contribution allocated either to the Educational Assistance Program or as
an Employee’s HSA contribution would not be eligible to receive other benefits from the
Educational Assistance Program or to make pre-tax payroll contributions to the
Employee’s HSA until after March 15 of the following year to prevent contributions
greater than the applicable limit under section 127(a)(2) or 223(b).

Taxpayer represents that the plan amendments would only change the Discretionary
Contributions to the 401(k) Plan, and that no changes would be made to the -- percent
safe harbor non elective contribution to the 401(k) Plan.

RULINGS REQUESTED

Taxpayer requests the following rulings:

   (1) The proposed amendment to the 401(k) Plan will not cause the 401(k) Plan to
       offer an additional cash or deferred arrangement pursuant to section 401(k),
       such that the Employer Contribution is considered an employee pre-tax
       contribution subject to the annual limitation under section 402(g);

   (2) The proposed amendment to the Retiree HRA will not affect the treatment of
       contributions to and payments made from the Retiree HRA that are used to
       pay and reimburse section 213(d) medical expenses of employees, retirees,
       and their spouses and dependents as amounts excludable from the gross
       income of the employees, retirees, and their spouse and dependents under
       sections 105(b) and 106;

   (3) The proposed allocation of any of the Employer Contribution to an
       Employee’s HSA is excludable from employees’ gross income under section
       106(d);

   (4) The proposed amendment to the Educational Assistance Program will not
       affect the treatment of payments made under the Educational Assistance
       Program as amounts excludable from an employee’s gross income under
       section 127(a)(1), up to the limit provided for in section 127(a)(2); and

PLR-122901-23 5

      (5) The employees’ ability to allocate the contribution between different programs
          will not prevent the Educational Assistance Program from qualifying as an
          educational assistance program under section 127.

LAW

401(k)

Section 401(k)(2)(A) provides that a qualified cash or deferred arrangement is any
arrangement which is part of a profit-sharing plan or stock bonus plan, a pre-ERISA
money purchase plan, or a rural cooperative plan, which meets the requirements of
section 401(a), and under which a covered employee may elect to have the employer
make payments as contributions to a trust under the plan on behalf of the employee, or
to the employee directly in cash.

Treas. Reg. § 1.401(k)-1(a)(3)(i) provides that a cash or deferred election is any election
by an employee to have the employer either: (A) provide an amount to the employee in
the form of cash (or some other taxable benefit) that is not currently available, or (B)
contribute an amount to a trust, or provide an accrual or other benefit, under a plan
deferring the receipt of compensation.

Treas. Reg. § 1.401(k)-6 defines non-elective contributions as employer contributions
(other than matching contributions) with respect to which the employee may not elect to
have the contributions paid to the employee in cash or other benefits instead of being
contributed to the plan.

Treas. Reg. § 1.401(k)-6 defines elective contributions as employer contributions made
pursuant to a cash or deferred election under a cash or deferred arrangement.

Treas. Reg. § 1.402(a)-1(a)(1)(i) provides that employer contributions to a profit-sharing
plan under section 401(a) are generally excludable from an employee’s gross income
except for the year(s) in which the contribution is distributed to the employee.

Retiree HRA

Section 106 provides that gross income of an employee does not include employer-
provided coverage under an accident or health plan. Treas. Reg. § 1.106-1 provides
that the gross income of an employee does not include contributions which the
employee’s employer makes to an accident or health plan for compensation (through
insurance or otherwise) to the employee for personal injuries or sickness incurred by the
employee or the employee’s spouse or dependents (as defined in section 152). The
employer may contribute to an accident or health plan either by paying the premium on
a policy of accident or health insurance covering one or more of the employees, or by
contributing to a separate trust or fund which provides accident or health benefits
PLR-122901-23 6

directly or through insurance to one or more of the employees. However, if the
insurance policy, trust or fund provides other benefits in addition to accident or health,
section 106 applies only to the portion of the contributions allocable to accident or
health benefits.

Section 105(b) states that except in the case of amounts attributable to (and not in
excess of) deductions allowed under section 213 (relating to medical expenses) for any
prior taxable year, gross income does not include amounts attributable to employer-
provided coverage if such amounts are paid, directly or indirectly, to the taxpayer to
reimburse the taxpayer for expenses incurred by the taxpayer for the medical care (as
defined in section 213(d)) of the taxpayer, spouse, or dependents (as defined in section
152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) and
any child (as defined in section 152(f)(1)) who has not attained age 27 as of the end of
the taxable year.

Treas. Reg § 1.105-2 provides that only amounts that are paid specifically to reimburse
the taxpayer for expenses incurred by the taxpayer, spouse, or dependents (as defined
in section 152) for the prescribed medical care are excludable from the taxpayer’s gross
income. Thus, section 105(b) does not apply to amounts that the taxpayer would be
entitled to receive irrespective of whether or not the taxpayer incurs expenses for
medical care.

In Rev. Rul. 2002-41, 2002-2 CB 75, an employer sponsored a health reimbursement
arrangement that was paid for solely by the employer and not through salary reduction
contributions. The HRA reimbursed substantiated medical care expenses (as defined in
section 213(d)) of participating employees and their spouses and dependents (as
defined in section 152) up to a maximum annual reimbursement amount. Unused
amounts from one coverage period were carried forward to subsequent coverage
periods. Participating employees had no right to receive cash or any other benefit in lieu
of medical expense reimbursements. In Situation 2 of Rev. Rul. 2002-41, the maximum
reimbursement amount under the HRA that was not applied to reimburse medical care
expenses before an employee retires or otherwise terminates employment continues to
be available after retirement or termination for any medical care expense under section
213(d) incurred by the former employee or the former employee’s spouse and
dependents. The ruling concludes that coverage and reimbursements made under the
HRA are excludable from the gross income of participating employees under sections
106 and 105(b).

Notice 2002-45, 2002-2 CB 93, provides that an HRA is an arrangement that: (1) is paid
for solely by the employer and not pursuant to salary reduction; (2) reimburses the
employee for medical care expenses (as defined in section 213(d)) incurred by the
employee and the employee’s spouse and dependents (as defined in section 152); and
(3) provides that any unused portion of the maximum dollar amount available during the
coverage period is carried forward to subsequent periods. Notice 2002-45 also provides
that benefits under an HRA must be limited to reimbursements of section 213(d)
PLR-122901-23 7

medical expenses and that all such expense reimbursements must be substantiated to
be excludable under section 105. Notice 2002-45 further provides that medical care
expense reimbursements under an HRA are excludable under section 105(b) if the
reimbursements are provided to the following individuals: current and former employees
(including retired employees), their spouses and dependents (as defined in section 152
as modified by the last sentence of section 105(b)), and the spouses and dependents of
deceased employees.

Health Savings Account

Section 106(d) provides that, in the case of an employee who is an eligible individual
under section 223(c)(1), amounts contributed by the employee’s employer to the
employee’s HSA (as defined in section 223(d)) are treated as employer-provided
coverage for medical expenses under an accident or health plan and are excludable
from the employee’s gross income to the extent that the amounts do not exceed the
limit set forth in section 223(b).

Educational Assistance Program

Section 127(a)(1) provides that the gross income of an employee does not include
amounts paid or expenses incurred by the employer for educational assistance to the
employee if the assistance is furnished pursuant to an educational assistance program
described in section 127(b). Section 127(a)(2) provides that the maximum amount
excludable from an employee’s gross income under section 127 is $5,250 per calendar
year.

Section 127(b)(1) requires a qualified educational assistance program to be a separate
written plan for the exclusive benefit of the employer’s employees.

Section 127(b)(4) provides that a qualified educational assistance program must not
provide employees with a choice between educational assistance and other
remuneration includible in the employee’s gross income.

Section 127(c)(1)(B) provides that qualified educational assistance includes, in the case
of payments made before January 1, 2026, the payment by an employer, whether paid
to the employee or to a lender, of principal or interest on any qualified education loan
(as defined in section 221(d)(1)) incurred by the employee for the education of the
employee.

Treas. Reg. § 1.127-2(b) provides that, while an educational assistance plan must be a
separate written plan, “[t]he requirement for a separate plan does not, however,
preclude an educational assistance program from being a part of a more
comprehensive employer plan that provides a choice of nontaxable benefits to
employees.” Treas. Reg. § 1.127-2(c)(1) provides that the benefits provided under a
qualified educational assistance program must consist solely of educational assistance.
PLR-122901-23 8

Treas. Reg. § 1.127-2(c)(2) provides that benefits will not be considered to consist
solely of educational assistance if the program, in form or in actual operation, provides
employees with a choice between educational assistance and other remuneration
includible in the employee’s gross income.

ANALYSIS AND CONCLUSION

401(k)

Taxpayer’s proposed amendments to provide eligible employees with a choice to
allocate the additional Employer Contribution (limited to $-------) to the 401(k) Plan, to
the Retiree HRA, to the Employee’s HSA, or to the Educational Assistance Program,
are made pursuant to an irrevocable annual election. 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. Accordingly, the proposed amendment to the 401(k) Plan will not cause
the 401(k) Plan to offer an additional cash or deferred arrangement pursuant to section
401(k). Further, the Employer Contribution is not considered an employee pre-tax
contribution subject to the annual limitation under Code section 402(g).

Retiree HRA

Taxpayer’s proposed amendments to provide eligible employees with a choice to
allocate the Employer Contribution to the 401(k) Plan, to the Retiree HRA, to the
Employee’s HSA, or to the Educational Assistance Program, are made pursuant to an
irrevocable annual election. Employees are not permitted to elect to have the Employer
Contribution paid in cash (or some other taxable benefit), and the Employer Contribution
is not made pursuant to a salary reduction election. In addition, such amounts only may
be used to provide benefits that reimburse medical expenses under section 213(d) and
may not be used to provide other taxable or nontaxable benefits and any unused portion
of the maximum dollar amount available during the coverage period is carried forward to
subsequent periods after the employee retires. Thus, the proposed amendment to the
Retiree HRA meets the requirements of Rev. Rul. 2002-41 and Notice 2002-45, and will
not affect the treatment of contributions to and payments made from the Retiree HRA
that are used to pay and reimburse section 213(d) medical expenses of employees,
retirees, and their spouses and dependents as amounts excludable from the gross
income of the employees, retirees, and their spouse and dependents under sections
105(b) and 106.

Health Savings Account

Taxpayer’s proposed amendments to provide eligible employees with a choice to
allocate the Employer Contribution to the 401(k) Plan, to the Retiree HRA, to the
Employee’s HSA, or to the Educational Assistance Program, are made pursuant to an
PLR-122901-23 9

irrevocable annual election. The Employer Contribution, which is limited to $--------, may
not exceed the limit set forth in section 223(b), ($4,150 for 2024). (See Rev. Proc. 2023-
23, 2023-22 IRB 883). Provided only employees who are eligible individuals under
section 223(c)(1) may elect to allocate the Employer Contribution to the Employee’s
HSA and the maximum amount that can be elected may not exceed the limit set forth in
section 223(b), an employee’s allocation to the Employee’s HSA of any of the Employer
Contribution to the Employee’s HSA is excludable from the gross income of the
employee under section 106(d).

Educational Assistance Program

Taxpayer’s proposed amendments to provide eligible employees with a choice to
allocate the Employer Contribution to the 401(k) Plan, to the Retiree HRA, to the
Employee’s HSA, or to the Educational Assistance Program, are made pursuant to an
irrevocable annual election. Employees do not have a choice between educational
assistance and other remuneration includible in the employee’s gross income.

Under the proposed plan amendments, the Employer Contribution to the Educational
Assistance Program may be used to pay the principal or interest on any qualified
education loan pursuant to section 127(c)(1)(B) and may not be used to provide other
benefits allowed under section 127 or other taxable or nontaxable benefits. The amount
available, which is limited to $--------, may not exceed the limit of $5,250 set forth in
section 127(a)(2).

The proposed amendment to the Educational Assistance Program will not affect the
treatment of payments made under the Educational Assistance Program as amounts
excludable from an employee’s gross income under section 127(a)(1), up to the limit set
forth in section 127(a)(2). In addition, the employee’s ability to allocate the Employer
Contribution among different programs will not prevent the Educational Assistance
Program from qualifying as an educational assistance program under section 127.

The rulings contained in this letter are based upon information and representations
submitted by Taxpayer and accompanied by a penalties of perjury statement executed
by an appropriate party, as specified in Rev. Proc. 2024-1, 2024-1 IRB 1, section
7.01(16)(b). This office has not verified any of the material submitted in support of the
request for a ruling, and such material is subject to verification upon examination. The
Associate Office will revoke or modify a letter ruling and apply the revocation
retroactively if there has been a misstatement or omission of controlling facts; the facts
at the time of the transaction are materially different from the controlling facts on which
the ruling was based; or, in the case of a transaction involving a continuing action or
series of actions, the controlling facts change during the course of the transaction. See
section 11.05 of Rev. Proc. 2024-1.
PLR-122901-23 10

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is based upon the assumption that the 401(k) Plan satisfies the qualification
requirements set forth in section 401(a) and expresses no opinion as to whether the
401(k) Plan is qualified under section 401(a), including, but not limited to, the eligibility,
vesting, and distribution rules, contribution limits, and coverage and nondiscrimination
testing.

This ruling expresses no opinion whether Taxpayer’s programs addressed herein satisfy
the nondiscrimination requirements, either in form or in operation, under section 105(h)
and Treas. Reg. § 1.105-11(c), under section 4980G and Treas. Reg. § 54.4980G-5(b),
or under section 127(b)(2) and Treas. Reg. § 1.127-2(e).

No opinion is expressed concerning the Federal tax consequences under any other
provision of the Code other than those specifically stated herein.

This ruling is directed only to the party requesting it. Section 6110(k)(3) provides that it
may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                                 Sincerely,



                                                 Denise Trujillo
                                                 Branch Chief, Health & Welfare
                                                 Office of Associate Chief Counsel
                                                 Employee Benefits, Exempt
                                                 Organizations, and Employment Taxes

cc: --------------------