Employees need emergency savings? IRS guidance on new pension-linked accounts

IRS just released guidance on a new type of emergency savings account, created under the Secure 2.0 Act of 2022.

Employers can start offering pension-linked emergency savings accounts (PLESAs) in plan years that begin after December 31, 2023.

By way of background, PLESAs are designed to help employees deal with financial emergencies.

They’re short-term emergency savings accounts that are linked to defined contribution (DC) plans, such as 401(k) plans.

Employers can make matching contributions, and such contributions should be made at the same rate as contributions to the connected DC plan.

The portion of a PLESA account balance attributable to participant contributions can’t exceed $2,500.

PLESAs are treated as designated Roth accounts – in other words, you’ll withhold taxes from the contributions. However, the employee won’t be taxed on withdrawals from these emergency savings accounts.

Employees can make withdrawals from PLESAs at least once a month, and the 10% additional tax on early distributions won’t apply.

Highly compensated employees can’t participate in PLESAs.

Controls on matching contributions

In Notice 2024-22, IRS acknowledged that plan sponsors may be concerned about employees manipulating the rules of the plan so that matching contributions exceed intended amounts or frequencies.

Setting an account balance of $2,500 or lower is a control that’s supported by the Secure 2.0 Act.

So is establishing an order of matching contributions (i.e., matches must first go to the underlying DC plan).

But the following procedures (among others) aren’t permissible, according to the IRS notice:

• requiring the forfeiture of matching contributions due to a participant’s withdrawal from a PLESA
• suspending the participant’s contributions to the PLESA on account of a withdrawal, and
• suspending matching contributions to the underlying DC plan.

DOL FAQ on emergency savings accounts

The Department of Labor (DOL) also recently provided input on PLESAs. In its FAQ, the DOL discusses several topics, including contributions. We’ll recap three points of particular interest to Payroll:

1. Plan sponsors can set up their PLESAs with an automatic contribution feature. But there’s a specified automatic contribution percentage: It’s 3% or less of the eligible participant’s compensation unless the participant affirmatively elects a higher or lower percentage.
2. You should include the contributions to a PLESA when determining whether an employee has met the annual elective deferral limit for retirement plans.
3. You have limited time to remit amounts withheld from an employee’s wages. You should remit the funds by the earliest date the contribution can reasonably be segregated from your company’s general assets. At the latest, you have until the 15th business day of the month immediately after the month in which the contribution is either withheld or received by the employer.