Saving for retirement is one of the most important tasks workers will have to manage with their income throughout their career. The problem with this is that usually employer retirement plans are either compulsory enrollment or nonexistent, without any additional options for employees. Considering the economic situation nowadays, that strict rule was hindering a lot of employees, who wished they could have done things differently.

But this all could change soon. In a private-letter ruling for one unnamed company, the IRS approved a system that allows employees to decide where they want their employer contributions to go into. Employees of that company now get to decide if their employer retirement contributions will go to a 401(k) plan, a health savings account, a retiree health-reimbursement arrangement, or their student loan payments.

For those employees that have not stated a preference over where their money should be deposited, the default answer will continue to be a retirement account, the employer contributions cannot be taken as cash or any other taxable benefit—they have to be funneled into one of the IRS approved options.

The new way to plan for retirement thanks to the IRS ruling

Although this company has remained anonymous, the effectiveness of the ruling is the same, other companies will now have the option to diversify their options in the same way and help their employees plan for the future in a way that matters to them and makes the most sense for their personal circumstances. Of course, for now, the move will still have to be approved by the IRS, but eventually this might become a standard practice that might allow employees to pay their student loans faster or have better medical care during retirement is that is an important concern for them.

This unprecedented IRS ruling was obtained with the help of Willis Towers Watson, a firm that specializes in providing benefit management and offers insurance brokerage and advisory services. After the ruling, Chris West, defined contribution strategy leader at WTW, explained that this ruling gives employees more control over how their employer’s nonelective contributions are distributed.

It doesn’t all need to go towards one cause, a portion can be used to plan for the future and go to their 401(k) and another portion can be used to go towards their student loan balance to begin paying off the debt quicker and avoid high interest rates and penalties. And best of all, it will be up to them and not their employer. This level of customization and control is something that could be appealing to many workers, especially those juggling retirement savings with other financial priorities like healthcare costs or student debt.

In his statement West said, “We believe that this [ruling] is really groundbreaking, because it is about flexibility and choice. This employer has received approval to do that, so down the road if other employers want to do the same thing or a version of it, the flexibility and choice is there. They just need to figure out what their ultimate design would look like.”

According to WTW, this is not the first time a proposal such as this one has been made to the IRS, other companies have tried and failed to obtain permission in the past to diversify the way the employer contributions are allocated, but this is the first time that an official ruling has been made on the matter.

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This might open the floodgates soon and the so-called employee-directed choice options could become more widespread in the future. Kevin Crain, executive director of the Institutional Retirement Income Council concurs, stating that the next ten years will be key to see how this new way of dividing contributions pans out.

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