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
The SECURE 2.0 Act, which was passed in December 2022, included a new feature called the Pension-Linked Emergency Savings Account (PLESA) in a delayed clause that would take effect in 2024 and significantly improve the financial stability of American workers. With the help of PLESAs, non-highly compensated employees can close a significant gap in their financial planning by giving them a way to save for emergencies without jeopardizing their long-term retirement goals or paying taxes on early withdrawals from retirement plans.
Understanding PLESA
PLESA authorizes organizations to give non-highly compensated workers (often defined as those whose annual salary in 2024 is less than $155,000) the choice to fund emergency savings accounts that are connected to their pension systems. Through the use of this creative strategy, employees will be prevented from using their retirement money during unanticipated costs and will be encouraged to save.
Employers have the option to automatically enroll workers in PLESA, with contributions limited to 1% and 3% of their gross pay, respectively. For these accounts, the maximum contribution amount is $2,500, however employers are free to select a smaller amount. Any earnings beyond $2,500 that are credited to the account won't go toward the $2,500 cap. Any further contributions are either stopped until the account balance drops below the cap or sent to the employee's Roth defined contribution plan, if eligible, once this cap is achieved.
But required participation is not the same as automatic enrollment. Before being automatically enrolled in a PLESA program, employees must get written notice, and they are legally entitled to opt out and withdraw their money at no charge.
Roth-like Basis and Matching Contributions
A PLESA allows contributions to be made with after-tax money on a Roth-like basis. For the purposes of an employer's retirement matching contributions, however, these contributions are considered voluntary deferrals. The yearly matching ceiling is set at the maximum account balance of $2,500 or less, as decided by the plan sponsor. Through employer matching contributions, this feature not only encourages employees to save, but it also increases the value of their savings.
Withdrawals and Transition Options
The SECURE 2.0 Act makes it easier for employees to access their savings in an emergency by eliminating fees for the first four withdrawals from PLESA each plan year, thus promoting the usefulness of these accounts. Additionally, in order to maintain the momentum of their savings journey, employees can choose to transfer their emergency savings accounts into an Individual Retirement Account (IRA) or their Roth defined contribution plan after leaving their employment.
A minimum of once per calendar month, PLESAs must permit participants to withdraw the entire balance of their account, in part or in full, at their discretion. The withdrawal must be distributed to the participant as soon as is reasonably possible after the participant chooses to make the withdrawal.
To withdraw from their PLESA, participants do not have to show that there is an emergency.
Pension-Linked Emergency Savings Accounts were introduced to help people meet their short-term financial demands while maintaining a focus on their long-term retirement objectives. By offering a disciplined and financially motivated approach to emergency savings, PLESA aims to improve workers' financial stability and lower the risk of premature withdrawals from retirement funds.
Find out whether your workplace provides PLESAs by contacting them. Employers who provide these accounts are expected to inform staff members when they become available. Please contact this office with any tax-related inquiries you may have regarding these accounts.
