The new year brought a lot of changes to retirement plans thanks to the Secure 2.0 laws, but the implementation of emergency-savings provisions is moving at a glacial pace.
“There’s still a lot of uncertainty,” says David Amendola, senior director of retirement at WTW, a workplace-benefits consultant. “My gut feeling is that we will not see appreciable adoption for some time.”
The IRS cleared up a little of the uncertainty at the beginning of the year by releasing guidance on how it expects the plans to work and how companies can keep employees from abusing the provisions for employer matches of contributions.
The way the government envisions this working is through a pension-linked emergency savings account, also known as a Plesa — something that could become as much of a household name as an HSA, or health savings account.
If an employer offers a Plesa, workers who make less than $155,000 will be able to contribute after-tax dollars into an emergency fund, which could be invested and grow tax-free in a separate Roth-like account. Employers will be able to match those contributions at the same rate they match retirement contributions.
If a worker needs to withdraw Plesa funds, they can do so once a month. The withdrawn funds are not taxed, since the money was taxed going in. Then the employee can replenish the funds up to the contribution cap of $2,500. So if a person puts in $2,500 and then takes out $500, they can put in another $500 at some point in the future.
The recent IRS clarification mostly related to how a plan is allowed to establish rules about the matching portion in order to prevent workers from abusing it by rolling money in and out of the account to get as much free money as they can.
Despite the clarifications, Amendola hasn’t yet seen any big companies or third-party record keepers start to work on functional programs, although most seem to be keeping an eye on what’s developing. According to Mercer, another workplace-benefits consultant, about 38% of large companies plan to add on emergency-fund or employee-hardship assistance in the near future, but such plans could take any number of formats.
Meanwhile, most companies are moving faster on programs to contribute matching funds to help employees pay student loans, which had about a five-year head start on emergency-savings funds, Amendola says.
“It’s not surprising or patently unreasonable for [companies] to wait,” Amendola says. “The IRS guidance was helpful, but it was very specific to anti-abuse. It’s going to be wait and see as to whether employers want to push record keepers, or will they all wait for more guidance. It could be a game of chicken.”
Don’t wait to save
In the meantime, workers facing busted water heaters, blown tires and root canals mostly have to fend for themselves. Mercer says about a third of big companies already have some sort of program in place for emergency funds or employee financial assistance, even if it’s an ad hoc program not covered by the Employee Retirement Income Security Act.
If your company has an account-based plan, it’s likely in the form of an incentive to open a savings account, either at an institution of your choosing or one with which the company has negotiated an incentive. Your savings would go in after taxes and your interest would also be taxed, unlike the Roth-based Plesa account. Any cash incentive your employer provides — even a gift card for $50 — would be taxed as income.
On the plus side, such a plan is easy to use, and one of the best things to do is to automate it. The Consumer Federation of America calls its drive to get more people to do this Split to Save. All you have to do in most workplaces is log into your payroll system and add another savings account into which to divert part of your paycheck, either by dollar amount or percentage. All it takes is a few clicks, and that money is out of your checking account and set safely aside for when you need it most.
