The new year has brought a lot of changes to retirement plans thanks to Secure 2.0 laws, but implementation of emergency savings provisions is moving at a slow pace.
“There's still a lot of uncertainty,” says David Amendola, senior director of retirement at WTW, a workplace benefits consulting firm. “My gut feeling is that we won't see concrete adoption for some time.”
The IRS cleared up a bit of the uncertainty at the beginning of the year by issuing guidance on how plans are expected to work and how companies can prevent employees from abusing provisions for employer matches for contributions.
The way the government envisions this working is through a pension-linked emergency savings account, also known as Plesa — something that could become as household a name as an HSA, or health savings account.
If an employer offers Plesa, workers who make less than $155,000 will be able to contribute after-tax dollars to an emergency fund, which can be invested and grown tax-free in a separate Roth-like account. Employers will be able to match those contributions at the same rate they match retirement contributions.
If a worker needs to withdraw Plesa funds, they can do so once a month. Withdrawn funds are not subject to tax, as the incoming funds are taxed. The employee can then replenish the funds up to the maximum contribution of $2,500. So, if someone puts in $2,500 and then takes out $500, they can put in another $500 at some point in the future.
The recent IRS clarification is mostly about how a plan is allowed to set rules around the matching portion in order to prevent workers from abusing it by shifting money in and out of the account to get as much free money as possible.
Despite the clarifications, Amendola has not yet seen any large companies or third-party log keepers start working on the functional software, although most appear to be keeping an eye on what develops. According to Mercer, another workplace benefits consultant, about 38% of large companies plan to add an emergency fund or assistance to struggling employees in the near future, but such plans can take any number of forms.
Meanwhile, most companies are moving faster on matching money contribution programs to help employees pay off student loans, which had a head start of about five years in emergency savings funds, Amendola says.
“It's not surprising or unreasonable at all [companies] “Wait,” says Amendola. “The IRS guidance was helpful, but it was very specific to combat abuse. We will have to wait and see if employers want to pay registrars, or if they will all wait for more guidance. It could be a game of chicken.”
Don't wait to save
Meanwhile, workers facing broken water heaters, smashed tires and root canals have to fend for themselves. About a third of large companies already have some type of program in place for emergency funds or financial assistance for employees, even if it's a dedicated program not covered by the Employee Retirement Income Security Act, Mercer says.
If your company has an account-based plan, it will likely be in the form of an incentive to open a savings account, either at an institution of your choice or one with which the company has negotiated an incentive. Your savings will go after taxes and your interest will also be taxed, unlike a Roth-based Plesa account. Any cash incentive offered by your employer — even a $50 gift card — will be taxed as income.
On the plus side, a plan like this is easy to use, and one of the best things you can do is automate it. The Consumer Federation of America is calling for more people to do this division to save. All you have to do in most workplaces is log into your payroll system and add another savings account to transfer a portion of your salary to, either in a dollar amount or a percentage. All it takes is a few clicks, and that money is taken out of your checking account and safely put aside for when you need it most.
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