SECURE 2.0 Offers New Type of Emergency Savings Account
By Lisa Haberman, MBA, MAM, ChFC, CLU
The recent passage of SECURE 2.0 has generated dozens of new provisions that affect virtually all types of retirement plans, with the intent of helping employees increase their retirement savings. Many new provisions also provide opportunities to access retirement nest eggs to offset unexpected expenses—including pension-linked emergency savings accounts (PLESAs).
Effective for 2024 and later plan years, employers may permit participants who are considered non-highly compensated employees to contribute up to $2,500 (indexed), or less if dictated by the plan, to a PLESA as part of their 401(k), 403(b), or governmental 457(b) plan.
Requirements
Congress outlines specific requirements for PLESAs in Section 127 of SECURE 2.0. First, a PLESA cannot have a minimum contribution or account balance requirement. In addition, assets must be held in cash, an interest-bearing account, or in an investment offered by a state or federally regulated financial organization that is designed to maintain the value of the contributions and provide a reasonable rate of return consistent with the liquidity needs of the account. PLESAs may also be subject to reasonable restrictions. Participants must be allowed to take distributions from their PLESA at least once each calendar month and processed as soon as practicable at no cost to the participant for the first four withdrawals during any plan year. However, a participant may be charged a reasonable fee for any subsequent withdrawals.
Contributions
Participants will either affirmatively elect or be automatically enrolled to make designated Roth contributions to a PLESA. The automatic enrollment feature will be capped at a maximum 3 percent. The plan sponsor may also elect an automatic increase feature, with increases occurring no more frequently than annually.
If a participant contributes to a PLESA and the employer makes matching contributions to the plan, the employer must match the participant’s contribution to the PLESA at the same rate as if the participant were making an elective pre-tax or Roth deferral; but the employer matching contribution will be made to the participant’s account in the plan that is not a PLESA. For purposes of matching contribution limits under the plan, matching contributions will first be attributable to elective deferrals rather than PLESA deferrals. Matching contributions on PLESA deferrals are limited to the maximum account PLESA account balance of $2,500 (or a lesser amount permitted under the plan). Once a participant has reached the limit, an employer may need to stop matching on the participant’s PLESA deferrals but continue to match on the participant’s non-PLESA deferrals.
Excess PLESA Contributions
Employers have three options to manage excess PLESA contributions:
have participants elect to increase contributions to their designated Roth accounts,
use a “deemed election” to increase contributions to participants’ designated Roth accounts, or
do not accept the excess contribution.
Distributions
All PLESA distributions are considered “qualified” distributions for purposes of the Roth basis recovery rules and the PLESA is considered a separate account for these rules. If a participant separates from service or a PLESA feature is terminated, distributions will be considered eligible rollover distributions but are not subject to mandatory 20 percent withholding. In addition, no direct rollover option needs to be given and the participant is not required to receive a 402(f) statement.
An employer may terminate the PLESA feature and, upon termination, allow participants to transfer amounts in the PLESA to their designated Roth account within the plan or receive the amounts personally. If the latter, payment must be made to participants within a reasonable period of time.
If a participant has excess deferrals that are distributed from the plan, the employer must distribute PLESA deferrals first, and apply those to the correction of the excess.
Disclosures
Similar to other retirement plan features, employers that allow PLESAs will be required to provide a notice to participants describing the PLESA rules 30-90 days before the first contribution or the date of any change in contribution rates, and at least annually in future years. The notice must include the participant’s balance and amount or percentage contributed to the account. The PLESA notice may generally be combined with other notices (e.g., safe harbor notices).
IRS Guidance
As part of the SECURE 2.0 legislation, the IRS is required to issue regulations by the end of 2023 to address remedies employers have to prevent abuse by participants. For example, a participant may make PLESA contributions only to receive a matching contribution before withdrawing the account balance and repeating the cycle to receive a free matching contribution. This issue and others will be monitored by the government before issuing a summary report after seven years.
