One of the many retirement options introduced under the SECURE 2.0 Act of 2022, enacted December 29, 2022, is the “pension-linked emergency savings account” (PLESA), the provisions of which are available for plan years beginning after December 31, 2023. Until recently, there has not been much discussion around PLESAs, but newly released guidance by the Department of Labor (DOL) has sparked interest among plan sponsors, plan fiduciaries, participants, and beneficiaries. In a nutshell, a PLESA is a short-term savings account established and maintained as part of an individual’s retirement savings plan, such as a 401(k) plan. The intent of the account is to provide employees with an additional option when unexpected expenses arise and prevent the need to tap into their retirement savings plans through loans and hardship withdrawals.
PLESAs, like other types of retirement plan features, are subject to a wide variety of rules including employee eligibility, funding contribution limits, distributions, rollovers, and more. Read on for a list of current/noteworthy PLESA provisions:
- Individuals must be eligible to participate in a plan’s PLESA if they meet any age, service, and other eligibility requirements of the plan, and if they are not a highly compensated employee.
- Employees who contribute to a PLESA may draw from the PLESA as frequently as monthly without reducing their retirement savings in their accounts within the linked defined contribution plans and without incurring the tax penalties ordinarily associated with early withdrawals from a retirement account.
- All contributions to a PLESA must be Roth (after-tax) contributions.
- Automatic enrollment is permitted. Once enrolled, a percentage of an employee’s wages may be withheld and contributed to a PLESA. However, employees must be given written notification before they are automatically enrolled into a PLESA program, and they have the right to opt out and withdraw their money at no charge.
- A plan cannot impose a minimum requirement on the amount required to open a PLESA or a minimum balance to be maintained in a PLESA.
- The portion of a PLESA attributable to participant contributions may not exceed the $2,500 maximum (as periodically indexed for inflation). Plan sponsors may choose to implement a PLESA with an automatic enrollment/automatic contribution feature, but the automatic contribution percentage must be at a rate of 3% or less of the compensation of the eligible participant unless the participant affirmatively elects a higher or lower percentage. In addition, contributions to a PLESA count toward the Code section 402(g) limit on elective deferrals ($23,000 for 2024).
- For plans that provide a matching contribution, an employee’s contributions to a PLESA must be eligible for matching contributions at the same matching rate established under the plan as for non-PLESA elective deferrals. All such matching contributions, including those attributable to PLESA contributions, will be allocated to the retirement savings portion of the plan and not the PLESA.
- The remittance rules that apply with respect to contributions to individual account plans also apply to contributions to PLESAs. That is, the plan sponsor should remit amounts withheld from wages to the PLESA as of the earliest date that such contributions can reasonably be segregated from the employer’s general assets, but in no case later than the 15th business day of the month immediately following the month in which the contribution is either withheld or received by the employer.
- Plans must separately account for participant contributions (and related earnings) to PLESAs. In addition, plans must maintain separate recordkeeping for each PLESA.
- Participants do not need to demonstrate or certify the existence of an emergency or other need or event to obtain a withdrawal from a PLESA.
- Plans have the discretion to allow PLESA withdrawals more, but not less, frequently than once per calendar month.
- PLESAs cannot be subject to any fees or charges, direct or indirect, solely based on a withdrawal of funds from the PLESA for the first four withdrawals in a plan year.
- There are currently no restrictions on the methods used for PLESA distributions to participants (e.g., check, electronic transfer, etc.).
- Allowable PLESA investment options include cash in an interest-bearing account or investment product that is designed to preserve principal, will provide a reasonable rate of return, and is offered by a state or federally regulated financial institution.
- Reasonable fees, expenses, or other charges associated with administration may be imposed directly on PLESAs.
- Participant disclosures (e.g., notices) are required; however, an individual’s PLESA account balance does not need to be included in his/her periodic pension benefit statement.
- Looking ahead to the 2024 Form 5500, the DOL is working on adding a PLESA feature code for plans to indicate on the Form 5500 and Form 5500-SF that the plan offers a PLESA feature. It will also provide instructions for filers with respect to how the PLESAs should be aggregated and reported on the various line items, forms, schedules, and attachments.
It remains to be seen if PLESAs catch on (particularly due to potential complexities at the recordkeeper level), but, for now, the emergency savings provisions are among the key biproducts of SECURE 2.0. They provide employers with the opportunity to help employees with their short-term financial challenges in a way that is tax-advantaged and incentivizes retirement savings at the same time.
Please contact us if you have questions about the information outlined above, our seasoned and experienced employee benefit plan professionals are here to help. You can also learn more about our Employee Benefit Plan Audit services by visiting our website.