Understanding Pension-Linked Emergency Savings Accounts: A New Option for Financial Security
Published on by Greg Heimann in Benefit Plan Audits, Construction
Emergencies can happen anytime, and they often come with unexpected financial burdens. Recognizing this, the SECURE 2.0 Act of 2022 introduced a new savings avenue – the Pension-Linked Emergency Savings Account (PLESA). The PLESA is designed to enhance financial security for workers, providing a crucial safety net in times of unexpected expenses.
What’s a PLESA?
A PLESA is a short-term savings account linked to an individual’s retirement savings plan such as a 401(k), 403(b), or 457(b) plan. It allows non-highly compensated employees to make after-tax Roth contributions to this separate account.
These funds can then be accessed as frequently as monthly to cover unpredictable, short-term emergency expenses without facing the penalties often associated with withdrawals from retirement savings.
While retirement accounts are typically intended to accumulate tax-favored savings over the long term, PLESAs are designed to provide readily available funds for short-term emergencies.
Contributions to a PLESA are capped at an inflation-indexed $2,500 annually, or a lower amount as determined by the employer. These contributions count towards the total maximum allowable elective deferrals under the Internal Revenue Code. If the employer provides a matching contribution on the existing retirement savings plan, they must also provide a matching contribution for contributions to a PLESA.
What are the benefits of PLESAs?
According to a Senate Finance Committee summary, nearly half of Americans would struggle to pay an unexpected $400 expense. PLESAs aim to alleviate this financial strain by allowing employees to accumulate easily accessible funds via payroll deduction.
Unlike with hardship withdrawals from retirement accounts, PLESA withdrawals do not require the participant to prove a specific financial hardship. Additionally, the first four withdrawals in a plan year are not subject to fees, a significant benefit in comparison to the standard $100 fee for hardship withdrawals. All PLESA withdrawals, including contributions and earnings, are tax-free due to the Roth nature of the contributions.
According to the U.S. Department of Labor (DOL), these accounts will enhance retirement security by reducing retirement plan leakage, which occurs when employees tap into their primary retirement savings due to unexpected expenses.
The DOL and the IRS have issued comprehensive guidance on the establishment and operation of PLESAs, providing clarity for both employers and employees.
What are the challenges of PLESAs?
PLESAs are not without potential challenges. They may increase administrative burdens for employers, from setting up separate PLESA accounts for each participant to managing frequent withdrawals.
Additionally, participants who do not withdraw their after-tax money for emergencies may miss out on the greater investment returns that the same contributions might have yielded in another plan account.
Despite these potential drawbacks, PLESAs offer a new avenue for employees to manage any financial emergencies without dipping into their retirement savings, thereby contributing to financial stability and security –essential factors in overall employee wellbeing and productivity.
As PLESAs become more commonplace, ongoing guidance from the Department of Labor and the IRS will be crucial in helping employers navigate the complexity of these new accounts. If you have any questions about PLESA reach out to our Employee Benefit Plan pros – as always, we’re here to help.
Looking for more information on the Secure Act 2.0? Check out our blog post on matching retirement plan contributions to student loan payments.
