Although employers have long helped employees save for retirement and have insurance in place for health care, another urgent need has persisted over the years: funds for financial emergencies.
To address this problem, SECURE 2.0, a law enacted in 2022, contains a provision allowing employer-sponsors of certain retirement plans to offer “pension-linked” emergency savings accounts (PLESAs) starting this year. So far, two federal agencies have issued guidance on the applicable rules.
Essential details
To offer PLESAs, an employer must sponsor a qualified defined contribution plan such as a 401(k), 403(b) or 457(b). Notably, only employees who aren’t “highly compensated” under the IRS definition may open an account. (We can help you determine whether any of your employees meet the definition.)
Employees can be either offered enrollment in a PLESA or auto-enrolled. Employers that choose the latter option must notify employees in writing of auto-enrollment and allow them to opt-out and withdraw any contributed funds at no cost.
The portion of a PLESA balance attributable to participant contributions can’t exceed an inflation-indexed $2,500 a year or a lower amount determined by the plan sponsor. Also, contributions count toward the Internal Revenue Code’s total limit on elective deferrals, which is an inflation-indexed $23,000 in 2024.
Contributions may be held as cash, in an interest-bearing deposit account or in an investment product. PLESA contributions are “Roth” in nature; in other words, they’re included in taxable income, but withdrawals are tax-free.
Account holders may withdraw funds at least once per calendar month. The first four withdrawals in a plan year can’t be subject to any fees or charges. From there, withdrawals may be subject to reasonable fees or charges.
IRS guidance: Anti-abuse rules
The first guidance on PLESAs to come out this year was IRS Notice 2024-22, issued on January 12. It discusses anti-abuse procedures intended to prevent participants from manipulating rules to cause excessive matching contributions.
According to the IRS, a reasonable policy balances PLESA participants’ ability to use the accounts for their intended purpose with plan sponsors’ obligation to prevent manipulation of matching contribution rules. The guidance states that it’s generally unreasonable to:
- Forfeit contributions already made,
- Suspend a participant’s PLESA use because of a withdrawal, or
- Suspend matching contributions to an associated retirement savings account.
However, plan sponsors may adopt anti-abuse procedures in addition to those already established under the Internal Revenue Code, so long as those supplementary procedures are reasonable.
DOL guidance: ERISA compliance
On January 24, the U.S. Department of Labor (DOL) issued its own guidance as a list of frequently asked questions (FAQs) on the agency’s website. The DOL’s FAQs focus largely on compliance with the Employee Retirement Income Security Act (ERISA).
For instance, ERISA prohibits minimum contribution requirements as well as minimum account balances. So, one DOL FAQ explains that plan sponsors offering PLESAs can’t:
- Force participants to close their accounts and take a distribution of the balance because of a minimum balance requirement,
- Impose penalties such as fees or right-of-withdrawal suspensions for failing to meet balance requirements, or
- Require a minimum contribution amount per pay period.
Another FAQ clarifies that plan sponsors may combine required PLESA notices with other ERISA-required notices, so long as they’re timely provided. The DOL intends to issue an updated 2024 version of Form 5500, “Annual Return/Report of Employee Benefit Plan,” to include reporting requirements for PLESAs.
A way to be helpful
PLESAs are a way for employers to help employees care for themselves through proper financial planning. However, as you can see, there are many rules involved. Contact us for help deciding whether your organization should add a PLESA feature to its qualified plan.
____________________________________
We highly recommend you confer with your Miller Kaplan advisor to understand your specific situation and how this may impact you.
