PLESA Accounts Can Favorably Narrow The Gap On Savings For Emergencies

Recent guidance for pension-linked emergency savings accounts, or PLESA, provided by the Department of Labor (DOL) and IRS will likely spur more companies to give employees the green light to set up an emergency savings account within their retirement plan.

Choosing between saving for emergencies or retirement has long confounded millions of Americans. Many people, especially low-income earners, delay savings for retirement when they are more worried about their immediate needs. A new Sofi survey found nearly 9 out of 10 employees feel stressed about finances, with 48% of respondents worried they don’t have enough for an emergency and 45% are short on retirement savings.

The good news is that American workers may get their wish to satisfy their priorities for an emergency savings account while paying attention to their financial future through innovative benefits.

An emergency savings account covering three to six months of basic living expenses is the first step to achieving financial security. Living without a savings plan can severely dent your household budget, as you must pay for car repairs or out-of-pocket costs at the dentist with credit cards, which may already carry high balances at exorbitant interest rates. Only 44% of U.S. adults can pay an emergency expense of $1,000 or more from their savings, according to Bankrate’s 2024 survey.

In the Employee Benefit Retirement Institute (EBRI) Workplace Wellness survey of employees, having enough money for an emergency to pay their monthly bills is the financial issue that 47% of workers say causes the most stress, surpassing retirement savings, now at the third spot at 45%. Over half of the employees surveyed indicated that their retirement plan savings are the only significant emergency savings they have.

Workers Want Their Employers To Sponsor Emergency Savings

EBRI’s survey found that more than four out of five employees would be interested in an emergency savings account if their employers provided it, though less than 20% report their companies offered such benefits in 2023. Legislation implemented in 2024 indicates that companies can begin allowing employees who hold employer-sponsored 401(k) retirement plans to set up PLESA accounts. Low-to-middle-income employees facing unexpected expenses are eligible for these accessible and liquid accounts without demonstrating an emergency. Lack of liquidity impacts families, particularly those with modest incomes.

What Are PLESA Accounts?

PLESA accounts are short-term emergency savings set up and maintained within an employer-sponsored 401(k) retirement account deposited in an interest-bearing savings account or certificate of deposit with a financial institution for liquidity and accessibility. All contributions to a PLESA must be as Roth after-tax contributions. Like contributions to retirement plans, employees can link these PLESA accounts to payroll with a worker’s approval and direct a portion of each paycheck to its emergency fund. According to the IRS, this opportunity is available to employees who earn no more than $155,000 in 2024. If employees’ compensation exceeds that threshold, they can leave their money in the account but can’t contribute more.

Companies can automatically allow employees with employer-based retirement accounts to set up short-term emergency savings accounts. Employees can link their accounts through payroll deductions, making contributions at no more than 3% of their salary up to $2,500 (adjusted for inflation after 2024).

How Match Contributions Work With PLESA

Contributions for emergency savings are not tax deductible or eligible for employer match contributions like retirement accounts. The DOL guidance allows employer sponsors to implement a PLESA with an automatic enrollment and contribution rate. Where the plan has a matching contribution, an employee’s contributions to a PLESA must be eligible for the matching contributions called for the 401 (k) retirement accounts, which are non-PLESA accounts. According to Plan Sponsor of America, 95% of large businesses provide matches on retirement contributions, with a 4.5% average of employee’s salaries. Employees should earn the match contribution from their employer as it is free. However, it may exceed the 3% percentage allowed for PLESA accounts. The difference between the 3% for PLESA and the 4.5% match will go into the retirement accounts.

More Flexibility To Withdraw Money

Participating employees can withdraw funds saved in PLESA accounts in whole or part without a 10% penalty or fees at their discretion, unlike withdrawals from retirement savings. These savings accounts are established and maintained by an employer-based defined contribution plan, like a 401 (k). Employees can withdraw at least once a month. Employers can charge fees or charges for withdrawals from PLESAs at least for the first four withdrawals in a plan year.

Employees will have a more significant ability to save for emergencies. Once they make contributions, knowing that money is in the account may alleviate the stress and anxiety associated with the uncertainty of being able to face unforeseeable events, adding more protection for a large swath of Americans.

Broader Access To Available Savings Tools

One concern about these accounts is whether people in the low-income bracket, those most in need of setting aside money for emergencies, can take advantage of this offering. It will depend on whether they work at companies offering 401(k) and implementing PLESA accounts. The Bipartisan Center (BPC) survey finds that only 67% of workers report having to contribute to a plan through their employers. However, according to the GAO, only 23% of low-income people without college degrees, with more volatile incomes and more tenuous job security, have the same access.

The hope is that people at modest income levels get significant entry to more jobs offering these retirement and emergency savings tools. Companies acknowledge their role in providing retirement and emergency savings tools, which could considerably narrow the disparity for many Americans who need them. Those who fear locking up their retirement savings for the future can feel more comfortable when they can withdraw for emergencies.

 This article was produced by Media Decision and syndicated by Wealth of Geeks.