Emergency Savings Account Guidance for Plan Sponsors

Reading time: 2 minutes 30 seconds

Over the past few years, there has been increasing concern about the retirement savings of the average American worker. Many will not have enough saved to enjoy the golden years. A key issue is the lack of access to an employer-sponsored retirement plan and the opportunity to benefit from matching contributions. Building upon prior reforms, Congress passed the SECURE Act 2.0 in late 2022, which calls for several changes, including an increase in the required minimum distributions (RMD), catch-up contribution increases, automatic enrollment, expanded access for long-term part-time workers, and pension-linked emergency saving accounts (PLESA). These individual accounts in defined contribution plans encourage participants to save for emergencies. All participant contributions to a PLESA are Roth contributions, may not exceed $2,500, and count towards limits of elective deferrals, which are $23,000 for 2024. Employees who contribute to a PLEASA may draw from it monthly without incurring tax penalties for early withdrawals like other retirement accounts.

Employers can offer PLESAs in plan years starting after December 31, 2023. This means eligible employees in specific plans could contribute as early as January 1, 2024. For this reason, the IRS recently released Notice 2024-22, which provides initial guidance on anti-abuse rules. To help clients, prospects, and others, JLK Rosenberger has summarized the key details below.

PLESA Matching Contribution Rules

Any employer matching contributions to a PLESA account must be made at the same rate as any other matching contribution. Such contributions cannot exceed the maximum account balance for the plan year ($2,500). Employers can limit the frequency of matching contributions only when necessary to prevent manipulation. Finally, there is no requirement to suspend matching contributions following a withdrawal of contributions.

Limitations to Prevent Manipulation

The new guidance includes the following rules to prevent manipulation, including:

• Order of Matching Contributions – Any matching contributions made under the plan are to be attributable to a participant’s elective deferrals other than those made to a PLESA. Any elective deferrals made to the plan will be matched first, lowering the availability of matching contributions for PLESA contributions.
• Limits on Annual Matching Contributions – As mentioned above, matching contributions that would cause the PLESA to exceed the maximum allowable balance ($2,500 or other amount set by the plan sponsor) are not allowed.

The steps are general guidance plans that can be followed to help prevent manipulation. Plan sponsors may want to consider implementing other rules that limit the amount and frequency of matching contributions. The goal is to prevent participants from taking distributions that maximize matching contributions while maintaining a limited balance. A plan sponsor can implement additional changes but only to limit bad actors.

Reasonable Procedures

There is also guidance on what constitutes a reasonable procedure. It is a procedure that balances participants’ interests using a PLESA for the intended purpose while preventing manipulation of plan matching. It can be challenging to detect manipulation because participants often change contribution patterns to match those legitimately participating.

The guidance also provides examples of specific procedures considered unreasonable and may not be used, including:

• Forfeiture of Matching Contributions – No rules can be established that matching contributions made to a PLESA be forfeited due to a participant withdrawal.
• Suspension of Contributions – A plan cannot suspend a participant’s ability to contribute to a PLESA due to a withdrawal.
• Suspension of Matching Contributions to the Underlying Plan – A plan cannot suspend a participant’s ability to receive a matching contribution due to withdrawal.

We’re Here to Help

The details of the initial guidance provide essential information for plan sponsors offering PLESAs to participants. It is important to note that it is only initial guidance and additional charges may be forthcoming. If you have questions about the information outlined above or need assistance with your next plan audit, JLK Rosenberger can help. For additional information, call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.