Although the SECURE 2.0 Act was enacted in December of 2022, the Pension-Linked Emergency Savings Account (PLESA) just became effective in 2024. PLESAs help non-highly compensated employees with financial planning by allowing them to save for emergencies without derailing their long-term retirement goals or incurring tax penalties for early withdrawals from retirement plans.
Overview of Pension-Linked Emergency Savings Accounts
With a PLESA, employers can offer non-highly compensated employees, those with compensation in 2024 that is less than $155,000, the option to contribute to emergency savings accounts directly linked to their pension plans. The goal of a PLESA account is to encourage savings and ensure that qualifying employees have a financial cushion to rely on in times of unexpected expenses without having to dip into their retirement funds.
As an employer, you can automatically enroll employees in PLESA with contributions set at no less than 1% and no more than 3% of their salary. The contribution cap for these accounts is set at $2,500, although employers have the discretion to set a lower limit. Earnings credited to the account of more than $2,500 would not constitute a violation of the $2,500 limit. Once this cap is reached, additional contributions are either directed to the employee’s Roth-defined contribution plan, if available or halted until the account balance falls below the cap.
However, it’s important to note that automatic enrollment is not the same as mandatory participation. Employees must be given written notification before they are automatically enrolled into a PLESA program, and they have the right under federal law to opt-out and withdraw their money at no charge.
PLESA, Roth-like Basis, and Matching Contributions
Contributions to a PLESA are made on a Roth-like basis, meaning they are made with after-tax dollars. However, these contributions are treated as elective deferrals for the purpose of an employer’s retirement matching contributions, with an annual matching cap set at the maximum account balance of $2,500 or lower, as determined by the plan sponsor. This feature not only incentivizes employees to save but also enhances the value of their savings through employer-matching contributions.
PLESA Withdrawals and Transitions To A Roth Or IRA
The SECURE 2.0 Act stipulates that the first four withdrawals from PLESA each year are not subject to any fees or charges, making it easier for employees to access their funds in emergencies. Upon separation from service, employees have the flexibility to take their emergency savings accounts as cash or roll them into their Roth-defined contribution plan or an Individual Retirement Account (IRA), ensuring the continuity of their savings journey.
PLESAs must allow for a withdrawal by the participant of the account balance, in whole or in part, at the discretion of the participant, at least once per calendar month and for distribution of such withdrawal to the participant as soon as practicable from the date on which the participant elects to make such withdrawal.
Participants do not need to demonstrate an emergency before making a withdrawal from their PLESA.
The introduction of Pension-Linked Emergency Savings Accounts addresses the immediate financial needs of workers while keeping their long-term retirement goals in focus. By providing a structured and incentivized way to save for emergencies, PLESA promises to enhance the financial resilience of the workforce and reduce the likelihood of early withdrawals from retirement accounts.
Check with your employer to see if the company offers PLESAs. Employers that offer these accounts are supposed to notify employees of their availability.