As part of the continued outgrowth of the wide-ranging Secure 2.0 Act of 2022, the Internal Revenue Service has provided initial guidance to assist employers with establishing pension-linked emergency savings accounts (PLESAs) to improve on retirement security. These types of accounts are designed to enhance retirement security by reducing retirement plan leakage, offering additional flexibility to workers and also permits employees with the ability to save if a financial emergency was to arise. Since these accounts are optional, the plan sponsor would be the deciding factor as to whether the burden in providing these accounts outweighs the benefits of offering them.
Employers who opt to offer this PLESA feature will be able to beginning with plan years after Dec. 31, 2023. Ultimately, with this timing it would mean that in some cases, eligible employees could have begun contributing to a PLESA as early as Jan. 1, 2024, so time was of the essence to provide this guidance.
Subject to certain restrictions, matching contributions are made for PLESA contributions at the same rate as contributions to the linked defined contribution plan. Employees who are eligible to be part of an employer’s defined contribution plan and qualify to contribute to a PLESA, can contribute to the account even if they don’t participate in the employer’s defined contribution plan. Participating employees can easily withdraw funds saved in their PLESA without the penalties of drawing from retirement savings. Since PLESAs are treated as designated Roth accounts, so while contributions aren’t tax deductible, withdrawals are generally tax free. With that said, participants can withdraw funds held in the PLESA at least once a month, as necessary. Typically, the maximum balance in a participant’s PLESA (attributable to contributions) is $2,500; however, it’s the employers discretion to opt for a lower limit.
It’s worth noting, there’s some potential for manipulation of the rules and the IRS hopes that with the proper guidance provided, it will help deter that. Guidance on reasonable measures employers who offer PLESAs can take to discourage potential manipulation of the PLESA matching contribution rules can be found in Notice 2024-22 on the IRS.gov website. A FAQ is available on the dol.gov website, by visiting this link: Read Frequently Asked Questions: Pension-Linked Emergency Savings Accounts.