Current:Home > ScamsWhat if you could choose how to use your 401(k) match? One company's trying that.-InfoLens
What if you could choose how to use your 401(k) match? One company's trying that.
View Date:2024-12-23 12:55:33
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! (4575)
Related
- Bull doge! Dogecoin soars as Trump announces a government efficiency group nicknamed DOGE
- The Philippines' capital is running out of water. Is building a dam the solution?
- Savannah Bananas announce 2024 Banana Ball World Tour schedule, cruise
- Simone Biles' good-luck charm: Decade-old gift adds sweet serendipity to gymnastics worlds
- Martha Stewart playfully pushes Drew Barrymore away in touchy interview
- Taylor Swift's Eras Tour film passes $100 million in worldwide presales
- Lawyers say election denier and ‘MyPillow Guy’ Mike Lindell is out of money, can’t pay legal bills
- 'Brooklyn Crime Novel' explores relationships among the borough's cultures and races
- Former NFL coach Jack Del Rio charged with operating vehicle while intoxicated
- 'I questioned his character': Ex-Ravens GM Ozzie Newsome on why he once grilled Travis Kelce
Ranking
- NFL Week 11 picks straight up and against spread: Will Bills hand Chiefs first loss of season?
- The Danger Upstream: In Disposing Coal Ash, One of These States is Not Like the Others
- Flood unleashed by India glacial lake burst leaves at least 10 people dead and 102 missing
- Ukraine says more than 50 people killed as Russia bombs a grocery store and café
- Kansas basketball vs Michigan State live score updates, highlights, how to watch Champions Classic
- Ukraine says more than 50 people killed as Russia bombs a grocery store and café
- Dick Butkus, Chicago Bears legend and iconic NFL linebacker, dies at 80
- How Gwyneth Paltrow Really Feels About Ex Chris Martin's Girlfriend Dakota Johnson
Recommendation
-
A $1 billion proposal is the latest plan to refurbish and save the iconic Houston Astrodome
-
Ranking MLB's eight remaining playoff teams: Who's got the best World Series shot?
-
Prada to design NASA's new next-gen spacesuits
-
Mortgage rates haven't been this high since 2000
-
12 college students charged with hate crimes after assault in Maryland
-
Selena Gomez gets support from Taylor Swift, Francia Raisa at benefit for her mental health fund
-
Nobel Peace Prizes awarded to Iranian women 20 years apart trace tensions with the West
-
Boy thrown from ride at Virginia state fair hospitalized in latest amusement park accident