Does Your Employer Offer Emergency Savings Accounts?

Article Highlights:

• Understanding Emergency Savings Accounts
• Plan Contributions
• Automatic Enrollment
• Opting Out of Automatic Enrollment
• Roth-Like Basis and Employer Matching Contributions
• Withdrawals and Transition Options

In a significant move to enhance the financial resilience of American workers, a delayed provision of the SECURE 2.0 Act, enacted in December of 2022, introduced a novel feature, the Pension-Linked Emergency Savings Account (PLESA) which became effective in 2024. The purpose of PLESAs is to address a critical gap in the financial planning of non-highly compensated employees by providing them with a mechanism to save for emergencies, without derailing their long-term retirement goals or incurring tax penalties for early withdrawals from their retirement plans.

Understanding PLESA - PLESA allows employers to offer their non-highly compensated employees (generally those whose compensation in 2024 is less than $155,000) the option to contribute to emergency savings accounts directly linked to their pension plans. This innovative approach is designed to encourage savings and also ensures that employees have a financial cushion to rely on in times of unexpected expenses, without having to dip into their retirement funds.

Employers can automatically enroll employees in PLESA, with contributions set at no less than 1% and no more than 3% of their salary. The contribution cap for these accounts is set at $2,500, although employers have the discretion to set a lower limit. Earnings credited to the account in excess of $2,500 would not constitute a violation of the $2,500 limit.Once this cap is reached, any additional contributions are either directed to the employee’s Roth defined contribution plan, if available, or halted until the account balance falls below the cap.

However, automatic enrollment is not the same as mandatory participation. Employees must be given written notification before they are automatically enrolled into a PLESA program, and they have the right under federal law to opt out and withdraw their money at no charge.

Roth-like Basis and Matching Contributions - Contributions to a PLESA are made on a Roth-like basis, meaning they are made with after-tax dollars. However, these contributions are treated as elective deferrals for the purpose of an employer’s retirement matching contributions, with an annual matching cap set at the maximum account balance of $2,500 or lower, as determined by the plan sponsor. This feature not only incentivizes employees to save but also enhances the value of their savings through employer matching contributions.

Withdrawals and Transition Options - To further promote the utility of these accounts, the SECURE 2.0 Act stipulates that the first four withdrawals from PLESA each plan year are not subject to any fees or charges, making it easier for employees to access their funds in emergencies. Moreover, upon separation from service, employees have the flexibility to take their emergency savings accounts as cash or roll them into their Roth defined contribution plan or an Individual Retirement Account (IRA), ensuring the continuity of their savings journey.

PLESAs must allow for a withdrawal by the participant of the account balance, in whole or in part, at the discretion of the participant, at least once per calendar month and for distribution of such withdrawal to the participant as soon as practicable from the date on which the participant elects to make such withdrawal.

Participants need not demonstrate an emergency before making a withdrawal from their PLESA.

The introduction of Pension-Linked Emergency Savings Accounts addresses the immediate financial needs of workers while keeping their long-term retirement goals in focus. By providing a structured and incentivized way to save for emergencies, PLESA promises to enhance the financial resilience of the workforce and reduces the likelihood of early withdrawals from retirement accounts.

Check with your employer to see if the company offers PLESAs. Employers that offer these accounts are supposed to notify employees of their availability. If you have tax questions related to these accounts, please contact this office.

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