Current:Home > FinanceWhat if you could choose how to use your 401(k) match? One company's trying that. -Infinite Edge Learning
What if you could choose how to use your 401(k) match? One company's trying that.
Rekubit View
Date:2025-04-07 03:03:24
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.
Pursue your education: See the best student loans
If other companies want to implement a similar flexible program, they’d have to make their own requests to the IRS.
Employee match and taxes:Roth 401(k) employer matches may trigger a tax bill for you. Here's what you need to know.
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 [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
veryGood! (7824)
Related
- EU countries double down on a halt to Syrian asylum claims but will not yet send people back
- Motorcycle riding has long been male-dominated. Now, women are taking the wheel(s)
- Kate Middleton Makes First Formal Appearance in 6 Months at Trooping the Colour 2024
- Big 12 commissioner Brett Yormark is perfect man as conference pursues selling naming rights
- Paige Bueckers vs. Hannah Hidalgo highlights women's basketball games to watch
- Rome LGBTQ+ Pride parade celebrates 30th anniversary, makes fun of Pope Francis comments
- Judge dismisses lawsuit challenging federal rules to accommodate abortions for workers
- Derek Jeter’s New York castle might finally have a buyer
- Taylor Swift Eras Archive site launches on singer's 35th birthday. What is it?
- $50M wrongful conviction case highlights decades of Chicago police forced confessions
Ranking
- All That You Wanted to Know About She’s All That
- Photos offer a glimpse of Bonnaroo music festival in Tennessee
- Much of U.S. braces for extreme weather, from southern heat wave to possible snow in the Rockies
- What College World Series games are on Saturday?
- Newly elected West Virginia lawmaker arrested and accused of making terroristic threats
- Kate Middleton Makes First Formal Appearance in 6 Months at Trooping the Colour 2024
- Rob Lowe Shares How He and Son John Owen Have Bonded Over Sobriety
- The 44 Best Amazon Deals Now: 60% Off Linen Pants, 60% Off Dresses $9.98 Electric Toothbrushes & More
Recommendation
Pressure on a veteran and senator shows what’s next for those who oppose Trump
Robert Pattinson, Adam DeVine and More Stars Celebrating Their First Father's Day in 2024
Big 12 commissioner Brett Yormark is perfect man as conference pursues selling naming rights
Horoscopes Today, June 14, 2024
How to watch the 'Blue Bloods' Season 14 finale: Final episode premiere date, cast
Horoscopes Today, June 15, 2024
2 killed and several wounded in shooting during a Juneteenth celebration in a Texas park
Victim identified in Southern California homicide case, 41 years after her remains were found