Imagine having the choice to apply your 401(k) employer match toward student loan payments or healthcare costs instead of just retirement. This could soon be a reality, thanks to a recent IRS ruling for employees at one company, who now have the option to direct their 401(k) match toward student debt repayment or a health reimbursement account, in addition to their traditional 401(k).

In August, the IRS issued a private letter ruling to this unnamed company, allowing employees to decide at the start of each year how they want their match to be used. If no preference is specified, contributions will default to their retirement account. Although this flexibility applies only to the specific company that requested the ruling, many view it as a potential precursor to broader options for U.S. workers to tailor 401(k) matches to their financial priorities.

If widely adopted, this shift could allow employees to focus their company’s match contributions on pressing financial goals beyond retirement — but could this flexibility truly benefit employees in the long term?

Benefits of a Flexible 401(k) Match

If the IRS extends this option to more companies, it could serve as a powerful recruitment advantage. By offering flexibility, employers could better address employees’ key financial concerns, whether those are related to education or healthcare expenses.

Individual employees could benefit as well, gaining support for areas of their financial life beyond retirement. According to Fidelity, about 22% of employees don’t claim their full 401(k) match, possibly due to financial constraints that prevent them from contributing enough to qualify. If matching contributions could help pay off student loans or medical bills, these employees could receive valuable financial assistance now while improving their financial stability over time. Even employees who already receive the full match might prefer this flexibility, using the match to reduce debt temporarily before resuming retirement contributions.

Potential Drawbacks of Redirecting 401(k) Matches

Despite the appeal, diverting 401(k) matches away from retirement has potential downsides. For one, reallocating funds to other financial goals reduces the power of compounding, which allows invested earnings to grow significantly over time. With many Americans already behind on retirement savings, reducing retirement-focused contributions could further widen the savings gap. Federal Reserve data shows that the median retirement savings for households ages 55 to 65 is $185,000, far short of what’s typically needed for a comfortable retirement. Additionally, a significant portion of Americans have no retirement savings at all, with 27% of retirees falling into this group.

Moreover, paying down debt like student loans or medical expenses may seem appealing but might not provide the best long-term return on investment compared to retirement contributions, especially as many student loans offer manageable, tax-deductible interest rates designed for gradual repayment.

As more companies consider this flexible approach, employees will need to carefully weigh their options before diverting funds from retirement. Unless debt is a major financial burden, prioritizing retirement contributions may still be the best path for long-term financial health.