Flexible Retirement Contributions: What To Consider Before Becoming A Cross-Benefit Pioneer

A look at the evolving landscape of retirement contributions

As organizations strive to meet the evolving needs of a diverse workforce, offering desirable benefits has become an essential consideration for HR professionals. A timely example is flexible retirement contributions, which allow employees to customize employer contributions to their unique circumstances. The hope is that flexible retirement contributions will enhance job satisfaction, help attract and retain talent, and promote long-term financial well-being. However, there are considerations for whether both your organization and the benefits industry are ready to embrace cross-benefit options.

Ruling on Flexibility from the IRS

In August, the Internal Revenue Service (IRS) issued a private letter ruling allowing an employer to offer flexibility to its employees to redirect a non-elective retirement plan contribution to the employee’s Health Savings Account (HSA), Retiree Health Reimbursement Account (HRA) or Educational Assistance Program. The private letter ruling came on the heels of IRS guidance for implementing a Qualified Student Loan Program match, which allows an employer to make a matching contribution in a participant’s 401(k) or 403(b) plan when that participant makes payments on qualified education loans. 

Both of these cross-benefit regulatory innovations reflect the idea that participants will get more of a benefit from their employer’s benefits programs if the employee has control over how contributions are allocated. In theory, giving employees more flexibility and ownership over their benefits could be an ideal way to draw and retain employees to your organization. 

Considering Recordkeeping, Compliance and Staff Time 

So, why wouldn’t a plan sponsor want to adopt a Qualified Student Loan Program match or pursue allowing employees to allocate plan contributions towards benefits outside the retirement plan? The answer lies in increased risks and costs related to plan compliance, at least in light of today’s technology and recordkeeping platforms. 

Most compliance testing is done within two systems: the plan’s recordkeeping platform and the employer’s payroll system. This is complex enough, as your third-party administrator and auditor can attest! Try adding a third system for monitoring loan payments or a fourth for HSA or Retiree HRA data, and the complexity will only grow. Until the benefits industry develops standards for integrating data across many different benefits providers, the cost of these types of cross-benefit contributions will be internal staff time. 

Specifically, resource-constrained employers will be left with new (manual) recordkeeping responsibilities to track compliance across plans, resulting in new sources of regulatory and fiduciary risk.  If the plan is subject to audit, these options will increase the transparency needed by plan auditors to third-party systems outside of the recordkeeping and payroll system in order to complete detailed compliance testing. Additionally, eligibility for each type of contribution adds another layer of complexity at the participant level, not only internally but for external parties such as plan auditors.

The Future of Cross-Benefit Innovations

Even if you believe your employees would welcome these cross-benefit regulatory innovations, it may be too early for all but the largest employers (with a deep HR staff) to pursue adopting them. Instead, you may be better off monitoring the adoption of these contribution strategies, along with the technology solutions recordkeepers and benefits providers put in place to offload those new plan sponsor compliance responsibilities and risks. Sometimes, the rewards outweigh the risks of being a pioneer—just not when it comes to retirement plan recordkeeping and compliance!

Jeffrey S. Coons, Ph.D., CFA, is the Chief Risk Officer at High Probability Advisors. Jeff is responsible for delivering investment solutions and advisory services to HPA’s clients, with a particular focus on serving institutional investors. He also is a member of the firm’s investment committee and management committee, utilizing his broad industry experience to support the HPA Team on corporate strategy, investment strategy and other aspects of the firm’s business. Jeff has over 30 years of investment industry experience, primarily with one large investment firm.

Scott Donnelly is a Partner at The Bonadio Group’s Assurance practice. He is responsible for overseeing financial statement audits and other attest services. His areas of industry specialization include real estate development companies, construction, and service providers. Additionally, Scott has extensive employee benefit plan experience, working with both SEC-registered and privately held companies on defined contribution plans, benefits plans, health and welfare plans, and 11-K filings. He serves on the Bonadio Firm Wide Employee Benefit Plan Audit Advisory Team and the Bonadio 401k Plan Committee.