The U.S. Department of Labor (DOL) Employee Benefits Security Administration (EBSA) has issued FAQs on optional pension-linked emergency savings accounts (PLESAs) as part of the implementation of the SECURE 2.0 Act of 2022 (ERISA section 801). SECURE 2.0 authorized 401(k), 403(b) and governmental 457(b) defined contribution plans to offer PLESAs beginning January 1, 2024.
Millions of workers are living from paycheck to paycheck and don’t have savings to cover unexpected expenses. A roundup of recent data shows 44% of U.S. adults say they would pay an emergency expense of $1,000 or more from their savings, according to a Bankrate survey. Of those without savings to fall back on, 35% would borrow with a credit card or personal loan or turn to friends or family.
- Nearly one in three (30% ) people in 2023 had some emergency savings, but not enough to cover three months of expenses, per the Bankrate survey.
- Nearly half of hourly workers said they have no emergency savings, according to a Branch report.
- Over 60% of U.S. adults are living paycheck to paycheck, according to a Lending Tree report.
Having emergency savings can improve employees’ sense of financial security and may improve retirement outcomes. Employers have several options when it comes to workplace emergency savings programs.
Questions and answers prepared by DOL in consultation with the Department of the Treasury and Internal Revenue Service (IRS) on January 17, 2024, provide general compliance information regarding PLESAs. Twenty Q&As cover eligibility, participation, automatic enrollment, contributions, withdrawals, investment options, fees, reporting and disclosure.
What is a PLESA?
PLESAs are short-term savings accounts within a plan sponsor’s defined contribution (DC) plan that have their own designated buckets and rules. The idea is to have a short-term savings account to periodically withdraw from, if needed, without reducing long-term retirement savings account balances. All of ERISA’s protections apply to PLESAs regardless of whether the employee participates in the retirement savings portion of the plan.
Following are FAQ highlights to help plan sponsors understand this optional feature and service providers to set up PLESA administration:
Participation
Who must be eligible to participate in a PLESA?
Employees are eligible if they meet any age, service and other eligibility requirements of the plan, and if they are not highly compensated (making less than $155,000 per year in 2024).
Can the plan establish a minimum amount for opening a PLESA or a minimum balance requirement?
No.
Contributions
Can contributions be made pre-tax?
No, employees make Roth contributions (a type of after-tax contributions) to a PLESA so there’s no tax or penalty for PLESA distributions (subject to some rules mentioned below).
Can a plan establish a minimum contribution amount per pay period?
No.
Can a plan require that PLESA contributions be made in whole dollars?
Yes.
Can a plan require that percentage-based contributions be no less than 1%?
Yes.
Can a plan require that percentage-based contributions be made in whole percent increments?
Yes.
Must all contributions be Roth contributions?
Yes.
Yes. For plans that provide a matching contribution, an employee’s contributions to a PLESA must be eligible for matching contributions at the same matching rate established under the plan as for non-PLESA (i.e., retirement) elective deferrals. All matching contributions will be allocated to the retirement savings portion of the plan and not the PLESA.
Can plans provide a matching contribution?
PLESA Limits
What is the PLESA limit?
ERISA section 801 provides that the portion of a PLESA attributable to participant contributions may not exceed the $2,500 maximum (as periodically indexed for inflation). Contributions to a PLESA count toward the Internal Revenue Code section 402(g) limit on annual elective deferrals ($23,000 for 2024).
Should the $2,500 limit be based on contributions or include earnings too?
Plans have flexibility to either include or exclude earnings on the participant’s contributions.
Can a plan include an annual limit for participant contributions to the PLESA in addition to the account balance limit?
No, because an annual limit on participant PLESA contributions could restrict a participant from replenishing funds in the PLESA following a withdrawal.
Auto-Enrollment
May employers automatically enroll employees in a PLESA?
Yes. An employer may decide to automatically enroll its employees into its PLESA program.
- Once enrolled, a percentage of an employee’s wages may be withheld and contributed to a PLESA.
- Employees must be given written notification before they are automatically enrolled into a PLESA program, and they have the right to opt out and withdraw their money at no charge.
- The automatic contribution percentage must be 3% or less (unless a participant affirmatively elects a higher or lower percentage).
Withdrawals
Do participants need to demonstrate an emergency before making a withdrawal from their PLESA?
No. Withdrawals are made at the participant’s discretion.
Can a plan impose limitations for withdrawals from a PLESA?
must allow for “withdrawal by the participant of the account balance, in whole or in part at the discretion of the participant, at least once per calendar month and for
Plans have the discretion to allow PLESA withdrawals more, but not less, frequently than once per calendar month.
Can a plan impose fees for withdrawals?
PLESAs cannot impose fees based solely on withdrawal of funds from the PLESA for the first four withdrawals in a plan year. However, PLESAs may be subject to reasonable fees in connection with any subsequent withdrawals (e.g., fifth withdrawal in a plan year).
Distributions
How soon are administrators expected to make a distribution to the participant?
Generally, administrators distribute the funds to the participant as soon as practicable from the date of withdrawal election.
Are there restrictions on how PLESA distributions are made (e.g., via check, debit card or electronic transfers)?
No, DOL does not at this time intend to establish restrictions on the manner in which plan administrators distribute PLESA funds to PLESA participants.
Investments
What types of investment products are permissible with respect to the designated investment option for a PLESA (e.g., money market funds, certificates of deposit, stable value funds and guaranteed insurance contracts)?
Plan fiduciaries may select any prudent investment product that satisfies the following:
- PLESA contributions are required to be held as cash, in an interest-bearing deposit account, or in an investment product designed to preserve participants’ contributions while providing liquidity and a reasonable rate of return.
- The product is offered by a state-regulated or federally regulated financial institution.
The objective for PLESA investments is capital preservation and liquidity consistent with immediate access to savings. Investment products that contain liquidity constraints, such as surrender charges at the participant or plan level, are generally incompatible with this objective.
Reporting and Disclosure
Do plan administrators have to make disclosures to participants in a plan offering a PLESA?
Yes, initial and annual notices are required. The Departments are evaluating whether, and the extent to which, a model notice to satisfy the requirements is feasible and may be helpful in future guidance.
May plan administrators combine the PLESA notices with other notices required by ERISA?
Yes.
Must the individual’s PLESA account balance be included in the individual’s periodic pension benefit statement or in the [participant-directed individual account plans] investment disclosures?
No.
Are there annual reporting (Form 5500) responsibilities for PLESAs?
Yes, DOL is updating the 2024 Form 5500 and instructions, but the updates are not ready as of this writing. Plans can expect a PLESA feature code on the Form 5500 and Form 5500-SF. DOL is working on instructions for information on PLESAs that should be aggregated and reported in relevant line items (e.g., contributions, investments, fees and expenses, and distributions, on the forms, schedules and attachments).
Other Considerations
Do employers have other options for offering workplace emergency savings accounts?
Yes, the simplest option to administer is payroll deduction savings accounts. Employers can help employees establish a savings account linked to the no-fee checking account at a bank or credit union and encourage employees to have a portion of their pay deposited in their savings account. Include this information in routine benefits communications—Employees may need consistent reminders and encouragement to build savings habits.
How else can employers support lower income employees?
Employers may find other ways to help lower-wage workers with financial, health and lifestyle challenges in our previous blog.
By offering workplace emergency savings programs, employers can help workers better prepare for unexpected expenses or financial shocks.
Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.
