Should You Include an Emergency Savings Program in Your Employee Financial Wellness Strategy?

By Julia Califano · March 15, 2024 · 5 minute read

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Should You Include an Emergency Savings Program in Your Employee Financial Wellness Strategy?

By now, financial wellness has become a watchword for employers. Helping your employees achieve financial independence helps you attract and retain talent and create a loyal, productive workforce.

But for many years, financial wellness has focused mostly on long-term goals like retirement and tuition savings. While these are important (indeed invaluable) benefits, the pandemic cast a spotlight on a basic but often missing element among many financial wellness programs: emergency savings.

According to the 2023 Workplace Wellness Survey by the Employee Benefit Research Institute (EBRI) , employees report that having enough savings for an emergency and paying monthly bills are the financial issues that cause them the most stress. This is the first time in the four-year history of the EBRI survey that saving for retirement was not the primary financial stress factor for employees.

You might imagine that this kind of financial stress can’t help but bleed into the workplace. And indeed it does. The EBRI survey (which included 1,505 full- and part-time workers) indicates that more than half of employees worry about finances while at work. That’s a significant swath of your workforce distracted by money problems.

Fortunately, there is a simple step employers can take to help their workers feel significantly more financially secure: Offering an emergency savings account (ESA) program at work.

How Emergency Savings Account Programs Work

An ESA is a low-cost benefit that allows employees to contribute after-tax payroll deductions automatically into a customized savings account. Funds are available anytime, for any reason, without the employer knowing when or why withdrawals are made.
What’s more, ESAs are portable, meaning that employees can take the emergency funds they’ve saved with them if they lose or leave a job.

To increase engagement in ESAs, some employers go a step further, offering a sign-up bonus, per-paycheck match, or bonus for reaching a certain savings milestone.

Recommended: How to Measure the Financial Well-Being of Your Workforce

Why Are ESAs Important Now?

Despite a resilient economy, falling inflation, and strong employment figures, many Americans still don’t have enough savings for a rainy day.

In Bankrate’s most recent annual emergency savings report (which surveyed 1,000-plus adults in December 2023), only 44% of subjects said they would be able to pay an emergency expense of $1,000 or more from their savings. Without savings to fall back on, 35% of respondents said they would borrow to pay a $1,000 unexpected expense, including 21% who would finance with a credit card and pay it off over time, 10% who would borrow from family or friends, and 4% who would take out a personal loan.

In the EBRI study, more than half of employees agreed that their retirement plan savings was the only significant emergency savings that they had. Among those without access to an emergency savings account at work, more than four out of five employees said they would be interested in one.

A government regulation also makes this a particularly good time to consider adding an ESA to your suite of financial wellness benefits.

Thanks to a provision in the SECURE Act 2.0 that went into effect on January 1, 2024, companies that offer 401(k), 403(b), or governmental 457(b) plans may now offer plan participants a “pension-linked emergency savings account” (PLESA) under Section 127 of the Act.

PLESAs are designed to help employees increase their emergency savings while simultaneously saving for retirement. How it works: Employers can now offer non-highly compensated employees an option to link their retirement plan to an emergency savings account. Employees may make Roth (after-tax) contributions until the account maxes out at $2,500 (or a lesser limit established by the employer). After that, additional contributions can be directed to the employee’s defined contribution plan or put on hold until the balance falls below the limit, at which point the employee can start contributing again.

Balances in an emergency savings account are eligible for distribution at least once per month and the first four distributions in a year must be free from any distribution fees.

Recommended: How Much Should Your Employees Have in Emergency Savings?

The Cost of Doing Nothing

Emergency savings is a key element of financial well-being, and one that few employers can afford to ignore. Think of financial wellness as a pyramid with three critical layers. The base is managing day-to-day finances. The middle level is working toward achieving long-term financial goals, such as retirement, saving for a home, and paying for children’s college. And the top level is the protection, such as insurance policies and other vehicles, necessary to guard against financial risk.

An emergency savings benefit is vital to maintaining all levels of the pyramid when there’s a crisis. As such, it’s at the very foundation of financial wellness. And without a sound foundation, there may be consequences at every level:

•   Day-to-day deprivation. Even the employed can suffer from food insecurity and potential eviction if they don’t have the savings to tide them through during emergencies.

•   Retirement savings leakage. After all those years of providing retirement planning, education, and services, the last thing you want to see is employees raiding their 401(k)s for emergency expenses or discontinuing their retirement contributions because they can’t make ends meet.

•   A lack of protection. Not having enough short-term savings can make it hard for employees to pay the premiums on the insurance they need to protect them against unexpected expenses in the future. That can be the start of a bad spiral. But an emergency savings foundation can prevent that spiral before it starts.

Recommended: How to Support Your Low-Wage Workforce

The Takeaway

Emergency savings accounts are a low-cost, easy-to-implement, and vital tool that can help reduce stress and build financial resiliency in your workforce. This, in turn, can boost employee productivity, engagement, and loyalty. They’re a great example of how doing what’s right for your workforce and its financial well-being may also be one of the best things you can do for your company as a whole.

SoFi At Work offers platforms that can help you create an effective ESA program for your employees.

Photo credit: iStock/alvarez

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