Financial experts suggest that people have a savings account to cover 4 to 6 months of expenses in case of an emergency. Yet, according to Bankrate, only 43% of Americans have $1,000 saved for an emergency. This can lead to stress and anxiety for employees who are in the other 57% of the population, which in turn can adversely impact productivity. To help alleviate the situation, if your business has a 401(k) plan, you can allow for a pension-linked emergency savings account (PLESA) beginning in 2024. Here are some considerations to help you decide whether to go forward and get this option established effective January 1.
Overview of PLESA
Once the PLESA is set up, it allows employees who are not highly compensated (earn more than $150,000 in 2023) to make after-tax contributions from their paychecks to a Roth-like account. This is not a retirement plan; it is an emergency savings account. Employee contributions aren’t tax deductible. Contributions cannot be made once the PLESA balance exceeds the lesser of $2,500 (which will be adjusted for inflation after 2024), or any other amount specified by the plan sponsor. An attempt to put in more will have to be returned to the employee or credited to a different plan (e.g., the 401(k) itself). If non-highly-compensated employee becomes highly compensated, funds can remain in the PLESA and are subject to withdrawal, but no additional contributions are permitted.
The funds must be deposited in an interest-bearing savings account or a certificate of deposit with a financial institution. No other investment options are permitted.
Employees can withdraw their contributions without restriction. This means it can be regular amounts monthly, or as needed, up to the account balance. The 10% early distribution penalty does not apply to withdrawals from a PLESA.
Pros and cons
As with just about every employee benefit, there are advantages and disadvantages. Clearly, enabling employees to save for emergencies—a car repair, an out-of-pocket dentist bill, etc.—can help to create a less-stressed workforce. There are no contribution costs to employers; only employee contributions are permitted.
But there are some drawbacks. You have the administrative cost of setting up and managing contributions. This means giving required notice, withholding employee contributions, and depositing them with the financial institution where the PLESA is kept. If you use a payroll company, check if there is any additional cost for this service or whether it’s part of what you already pay for. You cannot charge any administrative fee to an employee for the first 4 withdrawals within a year. If there are additional withdrawals, you can choose to charge a reasonable fee (what’s reasonable remains to be defined).
You can opt to terminate the PLESA at any time. When there is a termination, or if the employee leaves the company, the plan must allow for the transfer of funds to designated Roth account that’s part of your 401(k) plan, rolled over to another retirement plan, or distributed to the employee.
As mentioned earlier, you must give notice to employees about the PLESA no less than 30 days or more than 90 days before the first permissible contribution (the beginning of 2024 if you choose to have the plan in effect at that time).
Because the PLESA is a new creature in tax law, many of the rules have not yet been defined. What’s an emergency? What’s a reasonable fee for frequent withdrawals? Can or should you use an automatic enrollment feature with an opt out rule? The Department of Labor and the IRS are supposed to issue guidance, so let’s see what we learn in the coming weeks or months.
The purpose of this blog is to get you thinking about your employees and what you can do to help their financial situations without bankrupting your company. Consider discussing the PLESA option with your CPA, payroll company, or benefits adviser so you can act soon to get ready for 2024 if you choose to move forward.