Under the SECURE 2.0 Act of 2022, employers can now offer Pension-Linked Emergency Savings Accounts (PLESAs) within defined contribution retirement plans, such as 401(k), 403(b), and governmental 457(b) plans. These accounts are designed to help employees build emergency savings without compromising their long-term retirement goals.
Who Can Participate?
PLESAs are available to employees who are eligible to participate in their employer’s retirement plan and are not classified as highly compensated employees (HCEs). Generally, an HCE is an individual who earned more than $150,000 in the preceding year, though this threshold may be adjusted periodically. Employers may also set additional eligibility criteria, provided they are consistent with the plan’s terms and applicable laws.
How Do PLESAs Work?
- Contribution Limits: Employees can contribute up to $2,500 annually to a PLESA, though employers may set a lower limit. These contributions are made on a Roth basis, meaning they are after-tax contributions, and qualified withdrawals are tax-free.
- Automatic Enrollment: Employers have the option to automatically enroll eligible employees into a PLESA at a default contribution rate of up to 3% of compensation. Employees must receive prior written notice and have the opportunity to opt out or change their contribution rate.
- Withdrawals: Participants can withdraw funds from their PLESA at least once per month without incurring taxes or penalties. No proof of an emergency is required to make a withdrawal.
- Employer Matching: If the retirement plan offers matching contributions, employee contributions to a PLESA are eligible for matching at the same rate as other elective deferrals. However, the employer’s matching contributions are directed to the participant’s retirement account, not the PLESA.
- Investment Options: Funds in a PLESA must be held in principal-protected investments, such as money market funds, to preserve capital and ensure liquidity.
Platforms Offering PLESAs
As of now, T. Rowe Price has announced the launch of in-plan PLESAs for retirement plan participants, making it one of the first major providers to offer this feature. Their solution allows eligible employees to contribute to a PLESA within their existing retirement plan structure.
Other financial institutions, such as Fidelity and Vanguard, have acknowledged the provisions of SECURE 2.0 regarding emergency savings accounts and may offer similar features in the future. However, specific offerings and implementation timelines may vary, so it’s advisable to consult with your employer or plan administrator for the most current information.
If you’re interested in setting up a PLESA or learning more about your options, consider reaching out to Arcwood Financial, LLC to discuss your options.
