An estimated 4,000 nurses and midwives are to have an increment worth up to €1,500 restored.
The news follows a meeting this afternoon between nursing unions and Minister for Health Simon Harris.
The restoration is due to happen from 1 January.
The issue affected nurses who graduated between 2011 and 2015 and lost an increment for their clinical student placement of 36 weeks.
The Irish Nurses & Midwives Organisation, SIPTU and the Psychiatric Nurses Association met with the minister today to be briefed on the decision. They have welcomed the news.
INMO General Secretary Liam Dolan said it was a step in the right direction.
The unions held a joint protest outside the Dáil last month over the anomaly.
Mr Harris said that the restoration will also apply to nurses who graduated during these years but may have left the country and might be thinking of coming home.
Mr Harris said: "We have major challenges recruiting and retaining nurses in this country but I believe this is a small step forward. We need our nurses to stay and we need our nurses to come home."
Mr Harris acknowledged that the Department of Health needs to do more and he said the department continues to work with the Health Service Executive "to focus on a wide range of measures to progress recruitment and retention of nursing staff".
Speaking on RTÉ's News at One, Mr Harris said issues of pay and public sector pay were a matter for the Department of Public Expenditure and Reform and that further issues need to be addressed for nurses, including access to further educational opportunities and permanent contracts.
He said more beds were needed and his department is carrying out a bed capacity review.
"This has to be done on the basis of data and staffing and we also have to look at the role primary care can play as well," he said.
Mr Harris said that to date the HSE's 'Bring them Home' campaign has managed to recruit 88 nurses from abroad, a lower number than hoped.
Earlier, Mr Doran said incentives need to be offered to ensure that a recruitment drive is successful.
It was announced in the Budget on Tuesday that positions for 1,000 nurses and midwives would be advertised.
Speaking on RTÉ’s Morning Ireland, Mr Doran said the health service was competing for staff with the private health care sector and with the UK Health Trust, which gives sign-on payments to nurses, subsidised accommodation and early access to post-graduate education.
"Without a recognition that we are in a crisis, without the admission that we have to do something," said Mr Doran. "We have to incentivise. Offering posts that compete in the wider labour market is what is needed."
He said the HSE would struggle to hold onto nurses and midwives until there was a realisation of the need for "special incentives".
More pay was a key part of the solution, he added.
He said special incentives needed for nurses would have to apply across the board, for new and existing staff.
However, Mr Doran said even if the increment was implemented, it will not halt plans for industrial action.
"We are starting a nationwide consultation with members. Workloads are so unmanageable and our members will give us direction of what they want us to do."