While it’s been eight months since the U.S. Department of the Treasury and the IRS closed the comment period on Pension-Linked Emergency Savings Accounts (PLESAs) after notice 2024-22 provided initial guidance in January 2024 and solicited further feedback and comments, we’ve yet to get further guidance to help advisors and plan sponsors navigate Section 127 of SECURE 2.0 Act.
While the name is fairly descriptive, PLESAs are short-term savings vehicles that are maintained within the parameters of the established defined contribution (DC) account (both 401(k) and 403(b) are eligible plan types) and are treated as Roth. Their intention is to help savers have a small account for unexpected emergencies that aren’t covered under safe harbor hardship provisions.
The specifics
PLESA’s apply to plan years beginning after 12/31/2023 and can either be participant-elected or result from automatic enrollment for non-highly compensated employees making $160,000 in income or with 5% or more of ownership in 2025. This balance cannot exceed $2,500* or the lesser amount elected by a plan sponsor, and do count towards annual 402(g) limitations, which is $23,500 for 2025. It’s important for budget-conscious plan sponsors to recognize that employees’ contributions to their PLESA must also be eligible for employer matching contributions at the same established rate as non-PLESA elective deferrals. However, the matching contributions will be allocated to the retirement savings portion of the plan and not the PLESA, which will be entirely employee-funded as no employer contributions are allowed.
Additionally, PLESAs cannot be subject to fees or charges, direct or indirect, solely on the basis of withdrawal of funds for up to the first four withdrawals of a year, as participants have the discretion to initiate withdrawals from their PLESA more, but not less, frequently than once per calendar month. The PLESA does differ from the Section 115 Emergency Withdrawal provision, which necessitates repayment or a three-year pause on further withdrawals. The mandatory cash out provisions do not apply to the PLESA balance.
This existence of the PLESA also places more administrative burden on the plan sponsor, the recordkeeper and if involved, the third-party administrator (TPA), who must now consider the notice requirement, the potential investment considerations and their impact on the broader lineup. Plans must separately account for PLESAs and require sponsors to maintain separate recordkeeping with respect to each PLESA. Plan sponsors do have the ability to hold assets, where available, in a segregated omnibus account.
There are also likely reporting requirements that have not been fully established, but the DOL has added a PLESA feature to the 2024 Form 5500. If the value of the individual’s PLESA exceeds $2,500, then employees could shift those earnings back to the linked retirement account or be withdrawn from the PLESA, somewhat counter to what the account is trying to solve for. Ultimately, plan sponsors hold the ability to include or exclude earnings, so it’s another careful conversation advisors should be having with their interested sponsor clients.
Emergency savings outside retirement
Empower’s Emergency Savings study conducted in April 2024 showed that 37% of Americans couldn’t afford an emergency expense over $400 and 21% of people have no emergency savings at all. With the median emergency savings for Americans at $600, and 25% having dipped into their emergency savings in the last year, things are dire and the move towards allowing PLESAs in retirement vehicles is an attempt by the federal government to begin solving a larger population problem.
Unlike student loan matching, which has been publicized and promoted by some notable large employers, such as Walgreens, there have been very few jumbo or large plans advertising their consideration of these PLESA provisions. A recent Commonwealth case study showed that less than 2% of employees at a large employer took advantage of an in-plan variation while an out-of-plan split deposit program saw over 16% even without employer match. Both approaches were heavily marketed.
For smaller and medium-sized businesses, they need to weigh if the time spent managing the administrative considerations of offering emergency savings within the plans parameters makes the most sense, especially considering there are third-party outside plan providers such as Sunny Day Fund that can provide similar benefits without being factored into annual plan testing and administrative consequences.
Rachel Fox of Sunny Day Fund shares, “Saving for emergencies remains the top requested financial benefit for most working Americans, and Secure 2.0 catalyzed employers towards innovating on their retirement plans to meet that demand. Unfortunately, the early data shows in-plan variations may be too complex for employees who are already having to consume a library of benefits updates. The latest approach in letting employees withdraw $1,000 from their retirement savings may further muddle the time-tested message in saving for retirement, ‘set it and forget it.’ It will only further complicate the lives of HR or plan administrators who will have to explain the repayment provisions and further restrictions before further withdrawals.
“An out-of-plan option provides the customization and flexibility employers crave, while giving all employees quick and independent access to their emergency savings with the opportunity for an employer contribution,” Fox added. “As a fundamental framework, we shouldn’t be pointing people to the retirement account in times of emergencies – it’s not the tool designed for that job and undermines the purpose of that account. Retirement accounts and out-of-plan ESAs are symbiotic vehicles that are each strategically designed to accomplish their respective saving goals. Employers are better served leveraging context-specific tools to reach more effective and cost-efficient outcomes for themselves and their workforce.”
Ultimately, access to relatively low dollar emergency savings is an increasingly important necessity for American workers, who despite knowing why and how, are routinely not saving for these emergency needs independently. PLESAs may not be the answer to this problem. The administrative burden for the plan sponsor, recordkeeper and TPA make it cumbersome, along with the fact that withdrawals have no fees or charges — so who will ultimately end up paying for that aspect if the participant cannot? Most recordkeepers that we typically use for our retirement plans have not even talked about having availability of this provision. Advisors may want to bring an option outside of the PLESA if a plan sponsor is interested in helping their participants have an emergency savings option available.
* May be periodically indexed for inflation, per the DOL.
SEE ALSO:
Student Loan Matching in Retirement Plans: Tips for Advisors and Clients
Student Loan Matching in Retirement Plans: Tips for Advisors and Clients (Part 2)