DOL Issues Guidance on Secure 2.0 Emergency Savings Accounts

The Department of Labor has issued guidance on emergency savings accounts linked to retirement savings plans, a new benefit available this year under a provision of the Secure 2.0 Act of 2022.

Secure 2.0 amended the Employee Retirement Income Security Act (ERISA) to authorize the establishment of pension-linked emergency savings accounts (PLESAs), which are short-term savings accounts established and maintained as part of an individual’s retirement savings plan, such as a 401(k) plan. The provision creating PLESAs, Section 127, took effect on Jan. 1.

The DOL guidance comes in the form of 20 frequently asked questions.

Employers may automatically enroll their employees into PLESAs, make employee contributions to the PLESAs through payroll deductions, and make matching employer contributions to the linked retirement plans, the DOL clarified. Participating employees can withdraw funds saved in their PLESA without the penalties of drawing from retirement savings, while employers may set a limit of up to $2,500 for contributions. The PLESA feature is available for plan years beginning after Dec. 31, 2023.

The DOL also clarified that an employer may automatically enroll employees in the new emergency savings account program, but employees must be given the chance to opt out. The DOL also explained in the guidance that although PLESAs are referred to as emergency funds, participants do not need to demonstrate an emergency before making a withdrawal from their PLESA.

“Nothing in ERISA section 801 requires a participant to demonstrate or certify the existence of an emergency or other need or event in order for a participant to obtain a withdrawal from a PLESA. Rather, ERISA section 801(c)(1)(A)(ii) states that withdrawals are made at the discretion of the participant,” the DOL wrote in the FAQ.

Although the new program has the potential to significantly change the emergency savings program landscape in the workplace, consulting firm WTW doesn’t anticipate employers rushing to adopt the plans quite yet. Many plan sponsors were awaiting the guidance from the Labor Department and now will likely see if other employers adopt the accounts first.

“It was clear from the beginning that substantial guidance clarifying different open questions would be needed before the possibility of widespread adoption,” said Dave Amendola, senior director of retirement at WTW.

“We understand that most [defined contribution] plan record keepers are hesitant to ramp up preparation efforts to support these programs until they see more sponsors willing to adopt them, so the likely path to potential prevalence is the IRS/DOL issuing clarifying guidance, plan sponsors pushing the record keepers to support administration, and the record keepers following suit.”

Still, he said, the program has potential as emergency savings accounts have been a rising workplace trend over the past couple of years. However, the PLESA program is different than existing emergency savings programs because PLESAs are tied to retirement plans.

“Employers have been interested in some form of an emergency savings account for the last few years,” he said, “as so many of them have grappled with trying to best support employees who are struggling with short-term financial precarity.”