An IRS Ruling Could Open Up 401(k) Matches for Student Loans, Medical Payments

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.

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.)

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.