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How New Retirement Plan Emergency Savings Accounts Work

Starting in 2024, employers can offer their non-highly compensated employees the option to participate in emergency savings accounts that are linked to their company-defined contribution retirement plan accounts. This option was introduced in the SECURE 2.0 Act. Defined contribution plans include 401(k) plans. Employees can then make contributions out of their salary to fund their emergency savings accounts. Here’s what you should know.

The Basics

Emergency savings account contributions go into a special type of designated Roth account, which means they’re “after-tax” contributions that don’t reduce your taxable salary. The cap for your emergency savings account balance is $2,500 (with periodic inflation adjustments after 2024) or a lower cap set by the plan, if applicable.

You can then take federal income-tax-free withdrawals as often as once a month for emergency-related expenses. However, you don’t need to provide proof of an emergency to take withdrawals. That means you can withdraw money from the account at your discretion, to pay for whatever you wish, without any drama.

If the account balance falls below the applicable cap, you can make additional contributions until you reach the cap again. If you leave the company, you can cash out your emergency savings account balance.

Important: Your company plan must maintain separate records of transactions for your emergency savings account, including contributions.

Employers can automatically enroll employees into such an account with automatic contributions limited to 3% of salary. However, you can opt out of the deal if you wish or elect to make contributions at a different rate.

Matching Contributions

If your company makes matching contributions to the defined contributions to the defined contribution plan account that’s linked to your emergency savings account, your contributions to your emergency account can be matched. Matching contributions will go into the regular defined contribution plan account that’s linked to your emergency account, rather than into the emergency savings account itself.

However, your contributions plus any company-matching contributions can’t cause the $2,500 cap to be exceeded. Your company may also establish a lower cap, so be sure to review your plan documents.

Plans can either include or exclude emergency savings account earnings in applying the applicable account cap limitation. For example, if your company plan has a $2,500 cap, earnings credited to the account that cause the account balance to exceed $2,500 wouldn’t constitute a violation of the $2,500 cap rule – if the plan so provides.

Investment Guidelines

ERISA rules require that emergency savings account balances must be held in one of the following:

  • Cash,
  • An interest-bearing deposit account, or
  • An investment product designed to “maintain over the term of the investment the dollar value equal to the amount invested in the product and preserve principal and provide a reasonable rate of return, consistent with the need for liquidity.”

The overall objectives of the ERISA rules are to: 1) preserve capital and 2) maintain liquidity. This provides employees with immediate access to funds to respond to unexpected financial needs.

For More Information

The IRS and U.S. Department of Labor have supplied frequently asked questions and answers to help explain how these new emergency savings accounts work. The information in this article is consistent with the FAQs and answers. If your company offers the emergency savings account option, you must be supplied with full details to allow you to make an informed decision on whether to participate in the deal.