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Emergency Savings Accounts: What We Know (So Far) Emergency Savings Accounts: What We Know (So Far)

Emergency Savings Accounts: What We Know (So Far)

Section 127 of the SECURE 2.0 Act of 2022 amends the Employee Retirement Income Security Act of 1974 (ERISA) to provide that an individual account plan may include a “pension-linked emergency savings account” (referred to as a “PLESA”) that meets certain requirements, and makes corresponding changes to the Internal Revenue Code of 1986 (Code) regarding the tax treatment of these accounts. These provisions are effective for plan years beginning after December 31, 2023 (January 1, 2024, for calendar-year plans). 

Summary of Provisions

We have briefly summarized below the requirements for PLESAs under ERISA and the Code:
  • Applicable Plans. ERISA defines a PLESA as a short-term savings account established as part of an individual account plan that is a designated Roth account within the meaning of Code Section 402A. Similarly, the amendments to the Code provide that an applicable retirement plan may include a PLESA “established pursuant to” the new ERISA provisions added by SECURE 2.0. Code Section 402A defines an “applicable retirement plan” to include 401(k), 403(b), and governmental 457(b) plans. Further, SECURE 2.0 specifically provides that distributions from PLESAs are treated as satisfying the restrictions on in-service distributions applicable to 401(k), 403(b), and governmental 457(b) plans. This would suggest that PLESAs could be added to any 401(k), 403(b), or governmental 457(b) plan, regardless of whether or not covered by ERISA. However, since the Code amendments state that the PLESA must be “established pursuant to” the ERISA amendments relating to PLESAs, it is not clear that non-ERISA plans (such as governmental or church plans) can take advantage of these new rules. More guidance on this question is needed. 
  • Eligible Participants. Participants who (i) are not highly compensated employees under Code Section 414(q) (for 2023, a participant who earned $135,000 or more in 2022 is a highly compensated employee) and (ii) otherwise satisfy the age, service, and other eligibility requirements under the plan may contribute to a PLESA. A participant who becomes a highly compensated employee after contributing to a PLESA may not make any additional contributions to the PLESA, but may still withdraw any account balance of the PLESA in accordance with the applicable withdrawal rules (discussed below).
  • Enrollment. The plan can provide either that eligible participants (i) have to affirmatively enroll in a PLESA or (ii) are automatically enrolled in a PLESA pursuant to an automatic contribution arrangement of up to three percent of an eligible participant’s compensation unless the participant elects (after receiving reasonable prior notice) a lower rate of contributions or opts out of such contributions. The plan sponsor may amend the default contribution rate not more than once annually.
  • Contributions. A PLESA must be a designated Roth account funded solely by participant designated Roth contributions. No participant contributions can be made to a PLESA to the extent such contribution would cause the portion of the PLESA attributable to participant contributions (as opposed to earnings) to exceed $2,500 (adjusted in future years for cost-of-living) or such lesser amount determined by the plan sponsor. A plan cannot accept contributions in excess of this limit, unless the participant has another Roth account under the plan and the plan allows the participant to elect to increase contributions to the other Roth account or, if no election is made, deems the participant to have made a contribution to the other Roth account at the rate at which contributions were being made to the PLESA.
  • Coordination with Elective Deferral Rules. PLESA contributions appear to be treated as designated Roth contributions for purposes of the limits under Code Section 402(g). If excess deferrals under Code Section 402(g) are distributed to a participant, such distributions must first come from the participant’s PLESA account to the extent contributions were made to the PLESA during the applicable taxable year. 
  • Account Requirements. A PLESA is not permitted to have a minimum contribution or account balance requirement. A participant may not transfer amounts from another account under any plan of the employer into the participant’s PLESA. PLESAs may also be subject to other reasonable restrictions as permitted by the Department of Labor (DOL).
  • Withdrawals. Withdrawals from a PLESA must be allowed, in whole or in part at the discretion of the participant, at least once per month, and distribution of such withdrawals must be made as soon as practicable after the withdrawal election. For at least the first four withdrawals in a plan year, no fees or charges may be charged for a withdrawal. Thereafter, for the remainder of the plan year, reasonable fees or charges may be made for subsequent withdrawals. PLESA withdrawals are (i) treated as satisfying the Internal Revenue Code rules that restrict in-service distributions and (ii) not treated as an eligible rollover distribution for purposes of rules requiring an offer of a direct trustee-to-trustee transfer opportunity, the rollover notice, or 20-percent mandatory withholding.
  • Matching Contributions. If an employer makes matching contributions under the plan, matching contributions must also be made on contributions to a PLESA. Matching contributions are made to the matching contributions account under the plan and not to the PLESA, and the matching contributions with respect to the PLESA are capped for a plan year at the $2,500 limit. For purposes of this limitation, any matching contributions are treated as first applicable to elective deferrals other than contributions to the PLESA.
  • Requirements upon Termination of Employment or Termination of PLESA. Upon termination of the participant’s employment or of the PLESA by the plan sponsor, the plan must allow the participant to elect to transfer the PLESA to another Roth account under the plan and, for any amounts not so transferred, distribute the PLESA to the participant. Such distributions are treated as satisfying the Internal Revenue Code rules restricting in-service distributions. Unlike with respect to regular withdrawals, distributions made at termination of employment or of the PLESA are treated as eligible rollover distributions, except that they are exempt from the automatic IRA rollover rules for mandatory distributions of account balances over $1,000.
  • Taxation. Because participant contributions are made on a Roth basis, they are included in gross income when made to the plan and are excluded from taxation upon withdrawal or distribution. Importantly, any in-service withdrawals from the PLESA or distributions at termination of employment or termination of the PLESA are deemed to be “qualified distributions” such that the earnings are not included in gross income when withdrawn or distributed. 
  • Early Distribution Penalty. The 10-percent tax on early distributions does not apply to distributions from a PLESA. In addition, the 10-percent early distribution tax penalty does not apply to PLESA distributions that are rolled into another Roth account even if such PLESA contributions have not been held in the Roth account for the normally required five-year period.
  • Investments. A PLESA must be invested, as selected by the plan sponsor, in cash, an interest-bearing account, or an investment product designed to preserve principal, designed to provide a reasonable rate of return, and offered by a state or federally regulated financial institution.
  • Plan Requirements. The terms of the PLESA must be included in the written plan document. The plan must separately account for contributions to a PLESA and any earnings thereto and maintain separate recordkeeping with respect to each PLESA. A plan sponsor may terminate the PLESA feature at any time without violating the anti-cutback rules.
  • Notice Requirements. The plan administrator must provide a participant notice of the PLESA feature between 30 to 90 days prior to the date of the first contribution to a PLESA (or the date of any change to the default contribution rate under an automatic contribution arrangement for a PLESA), and not less than annually thereafter. The contents of the notice are specified in the statute, and include (1) the purpose of the PLESA feature, (2) the limits on contributions, (3) the tax treatment of contributions, (4) any fees or restrictions on PLESAs, (5) the procedures for making and changing contributions, (6) the procedures for and limits on withdrawals, (7) the amount of the intended contribution to the PLESA, (8) the PLESA balance, (9) the designated investment option, (10) the options for the PLESA upon termination, and (11) the consequences of becoming a highly compensated employee. This notice can be consolidated with the qualified default investment alternative (QDIA) notice and any applicable automatic contribution notice (automatic contribution arrangement (ACA), qualified automatic contribution arrangement (QACA), or eligible automatic contribution arrangement (EACA)).
  • Anti-Abuse Rules. The plan may have reasonable procedures to limit the frequency or amount of matching contributions with respect to PLESA contributions in order to prevent manipulation (for example, participants who make PLESA contributions solely to receive the match and then immediately withdraw the contributions). Further, a plan with a PLESA feature is not required to suspend matching contributions following a withdrawal of PLESA contributions by a participant.
  • ERISA Preemption. The PLESA rules under ERISA preempt any state laws that would directly or indirectly prohibit or restrict the use of an automatic contribution arrangement for PLESAs. There are not parallel provisions under the Internal Revenue Code rules.
  • ERISA Section 404(c) Protection. The amendments to ERISA make clear that PLESAs meeting the investment requirements set forth above can qualify for ERISA Section 404(c) protection.
  • Basis Recovery Rules. For purposes of the basis recovery rules under Code Section 72(d), PLESA contributions (like other employee contributions to defined contribution plans) may be treated as a separate contract.

Regulations and Reports

There are many items that need clarification for plan sponsors and recordkeepers to implement PLESAs. SECURE 2.0 grants regulatory authority to the DOL and the Internal Revenue Service (IRS) in the areas outlined below:
  • ERISA reporting and disclosure requirements for PLESAs, including any exemptions or simplified requirements (DOL); 
  • ERISA preemption with respect to PLESAs (DOL);
  • Anti-abuse rules for PLESAs (IRS); and
  • General regulations and guidance to carry out the purposes of PLESAs including adjustment of the $2,500 limits for inflation, the expansion of correction programs, model plan language and notices related to PLESAs, and the interaction of the PLESA rules with the QACA rules (DOL and IRS).
The DOL and the IRS are also required to conduct a study on the use of PLESAs and report their findings to Congress within seven years from enactment.

Practical Considerations

Below are a few considerations for plan sponsors in determining whether or not to add PLESAs to their plan:
  • Plan sponsors with a large population of lower-paid employees may want to consider PLESAs since this option may incent such employees to start or continue contributing to the plan, given that they will not lose needed financial flexibility in doing so.
  • Plan sponsors with low plan participation rates may want to consider PLESAs (together with other SECURE 2.0 Act options such as providing de minimis financial incentives for participating or making matching contributions on student loan payments) as a tool to increase participation.
  • Plan sponsors who want to encourage employees to create “rainy day” funds for unforeseen emergencies, particularly in light of the recent COVID pandemic, may want to consider PLESAs (together with other SECURE 2.0 Act options such as emergency expense distributions).
  • Given the ambiguity of its application to non-ERISA plans, plan sponsors of church and governmental plans should wait for additional guidance or clarification on whether a PLESA can be added to their plans.
As 2024 will be here quickly, plan sponsors should start discussing PLESAs as an option for their plans with their recordkeepers and benefits counsel soon. 

For additional information or to discuss whether PLESAs is an option for your plans, please contact Tara Sciscoe, Stan Prybe, or the Ice Miller Workplace Solutions attorney with whom you regularly work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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