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AN IRS RULING COULD OPEN UP 401(K) MATCHES FOR STUDENT LOANS, MEDICAL PAYMENTS


By
Trina Paul

Full Bio
Trina Paul is a Breaking News and Personal Finance Writer at Investopedia,
covering topics like retirement, consumer debt, and retail investing. She
focuses on making complex financial topics accessible and interesting to
everyday readers, explaining everything from Social Security to the intricacies
of 401(k)s. 
Learn about our editorial policies
Updated November 01, 2024
04:45 PM EDT
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J. David Ake / Getty Images


KEY TAKEAWAYS

 * The IRS in August determined that a company could change its retirement plan
   to give employees the option of allocating their 401(k) matching
   contributions toward their student loan repayments or medical expenses.
 * During open enrollment, employees would make an annual election for those
   matching contributions.
   
 * This ruling only applies to one company, but since the 2022 enactment of
   Secure 2.0 legislation, all employers have the option to give their employees
   the ability to use matching contributions to pay off their student loans.

The IRS has allowed workers at one company use to use 401(k) matching
contributions to pay for medical and student loan expenses, indicating the
possibility that others might someday be able to do the same.



The agency in an August ruling determined that a company, which it didn't name,
could allow its workers to allocate matching contribution to their 401(k),
retiree health reimbursement arrangement (HRA), health savings account (HSA), or
an educational assistance program used to pay off student loans.1




During open enrollment, employees would make an annual election for those
matching contributions. If the employee doesn't make a choice, those
contributions are allocated to their 401(k).



While the private letter ruling only applies to one company, under the Secure
2.0 Act—a federal retirement law passed in 2022—all companies can now offer
employees matching contributions to pay off student loans. This change went into
effect at the beginning of 2024, but it's unclear how many employers currently
offer the benefit or plan to in the future. (Private letter rulings often are
made and released months after an entity makes a request.2)




FLEXIBILITY COULD HELP WORKERS, BUT CAN COME AT A COST

This move, if undertaken at the company that made the IRS request, would give
employees the option to use matching contributions to pay off student loans or
to stash money in an HSA, but could come at the cost of missed retirement
savings down the road, according to Melissa Caro, a certified financial planner
(CFP).



"Ultimately, the best approach is to contribute as much as possible to your
401(k), including the employer match," Caro said in an email. "If debt needs
attention, cutting back elsewhere may help you manage it better, rather than
diverting from your retirement savings."



She does, however, note that an HSA can provide tax savings and be used to pay
off health expenses in retirement.



And some might benefit from using the match to pay off student loans: “For
high-interest student loans [above 7%], using your match for repayment can make
sense," wrote Priya Malani, founder of Stash Wealth, in an email.



Update: This article has been updated to add the comment from Malani.

Do you have a news tip for Investopedia reporters? Please email us at
tips@investopedia.com
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Article Sources

Investopedia requires writers to use primary sources to support their work.
These include white papers, government data, original reporting, and interviews
with industry experts. We also reference original research from other reputable
publishers where appropriate. You can learn more about the standards we follow
in producing accurate, unbiased content in our editorial policy.

 1. IRS. "Number: 202434006."

 2. Internal Revenue Service. "Part 32. Chief Counsel Directives Manual
    Published Guidance and Other Guidance to Taxpayers."



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Related Terms
Medical Savings Account (MSA): Meaning, History, Types
A Medical Savings Account (MSA) was a forerunner of a Health Savings Account
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more
Student Loan Interest Deduction Definition and How To Claim It
The student loan interest deduction allows for a tax break of up to $2,500 for
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Limited Purpose Flexible Spending Arrangement (LPFSA): Overview
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Archer MSA: What it is, How it Works, History
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What Is a Progressive Tax? Advantages and Disadvantages
A progressive tax imposes successively higher tax rates on higher amounts of
income. The U.S. has a progressive tax so you don't pay the same rate on all
your income.
more
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