Workplace Emergency Savings: In-Plan vs Out-of-Plan Options Under SECURE 2.0

By Walecia Konrad · March 15, 2024 · 7 minute read

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Workplace Emergency Savings: In-Plan vs Out-of-Plan Options Under SECURE 2.0

These days, a growing number of employers are focused on how to help their workers build emergency savings accounts. And for good reason: According to Bankrate’s 2024 Annual Emergency Savings Report, over two-thirds of adults are worried about having sufficient emergency savings to cover just one month’s living expenses. Even more concerning, a full 57% of Americans are unable to afford a $1,000 emergency expense.

When workers lack a safety net, they’re often forced to take on high-interest debt or raid their retirement savings to cover a car repair, medical bill, or other unexpected cost — actions that have long-term financial consequences.

Fortunately, employers are in a unique position to help. By offering an employer-sponsored emergency savings account (ESA), you can make it easy for workers to save for a rainy day. This, in turn, can help them manage the unexpected, avoid expensive debt, and feel less stressed and more financially secure.

Currently, there are two main options for emergency savings benefits — out-of-plan ESAs and in-plan ESAs.

Traditional out-of-plan ESAs are savings programs that allow employees to automatically set aside a portion of their paychecks toward an emergency fund, sometimes with an employer match. Standalone ESAs are simple and portable but don’t have an auto-enrollment feature.

New for 2024, plan sponsors may also offer “pension-linked emergency savings accounts,” better known as PLESAs. These are short-term savings accounts that are part of an employer-sponsored defined contribution plan. While PLESAs can be an excellent solution for many employees, populations that have not historically been in-plan are unintentionally left out or may not participate to the fullest extent.

To determine which solution will work best for your firm read on. Below, we take a closer look at how each ESA option works, their pros and cons, and why you might decide to take a dual approach to ensure you are serving all segments of your workforce.

PLESAs: The In-Plan Emergency Savings Solution

The SECURE 2.0 Act of 2022 created PLESAs (pension-linked emergency savings accounts) , which employers can offer as of January 1, 2024. This new benefit allows lower- and middle-income employees to make after-tax Roth contributions to a separate PLESA account that is part of the employer’s defined contribution retirement plan, such as a 401(k) or 403(b).

Employees can draw on that account as needed to cover unpredictable, short-term emergency expenses (like a car or home repair or medical bill) without incurring tax penalties or reducing retirement savings. Funds can be transferred directly to a bank account.

The maximum annual contribution the government allows is $2,500 for 2024, although employers can elect to implement lower maximums. There is no minimum required balance.

If an employer offers a matching contribution to the retirement plan, matches must also be made toward PLESA contributions, but those funds would be deposited in the retirement savings portion of the plan. This would conceivably allow employees to save for emergencies and build their retirement accounts at the same time, albeit at low amounts.

Pros and Cons of In-Plan ESAs

If a large proportion of your employees are already enrolled in and contributing to a defined contribution retirement savings plan, then adding an in-plan ESA might be a convenient emergency savings solution for those employees. Because the in-plan ESA is linked to the retirement plan and employers can automatically enroll employees, it might be more affordable than a traditional ESA for some companies to launch. Auto-enrollment can also increase utilization.

However, PLESAs also have some drawbacks and limitations. For one, these plans cap contributions to $2,500. Any amount contributed can be redirected to the employee’s Roth contribution subaccount. Still, if an employee wants to save more than the cap toward a potential future emergency, they can’t do it in the in-plan ESA.

Additionally, PLESAs have inherent inequalities, as all employees don’t have equal access to defined contribution retirement savings. Hourly and seasonal workers, for example, may not have access to an in-plan ESA. Minority employees, including Black and Hispanic workers, may also get left out.

According to a November 2023 report from the MIT Sloan School of Management , the average retirement plan contribution rate of Black and Hispanic workers is roughly 40% lower than that of white workers. This is due, in part, to racial wage disparities and continued obstacles for some groups to move to the upper ranks of employment. Lack of generational wealth is also a factor, as children of the rich often save more for retirement and begin saving earlier than other groups.

Recommended: How Employers Can Help Close the Racial Wealth Gap

Standalone ESAs: The Out-of-Plan Solution

An out-of-plan ESA is a standalone benefit that operates more like other traditional rainy-day funds.

Employer-sponsored ESAs are usually automated savings accounts that take after-tax payroll contributions and automatically put them into a customized, no- or very low-fee savings account that earns interest. The employer or financial vendor determines the maximum and minimum contributions the employer hires to manage the accounts.

Many companies offer matching contributions to these emergency savings accounts, separate from any retirement savings contributions. Withdrawals can be made at any time for any reason. And ESAs are portable, so employees can take their saved funds with them if they leave or lose a job.

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

Pros and Cons of Out-of-Plan ESAs

For many employers, out-of-plan solutions are appealing because these accounts are often hosted through banking platforms that can provide greater ease and accessibility of the funds for users. Compared to in-plan options, employers have more choices and flexibility around how to structure the out-of-plan ESA and whether and how to match any employee contributions to it.

Another upside is that there is no cap on an employee’s contribution to their emergency savings. They can save more than $2,500 if they feel they need it someday, and emergencies that stretch beyond that $2,500 cap can still be fully covered with the out-of-plan ESA if the money is in the account.

Perhaps most importantly, all employees, regardless of salary, are eligible for a traditional ESA. An HR team can offer out-of-plan ESAs to employees who would not otherwise qualify for a retirement savings plan, as well as workers who have access to a retirement plan but might opt out or not fully participate.

On the downside, the separation of an out-of-plan ESA from a retirement savings plan could make it costlier to initiate for companies that already have defined contribution plans. In addition, there is currently no auto-enrollment available for out-of-plan ESAs, which could lower utilization. And, excess contributions in this case won’t spill over and help workers build long-term retirement savings.

A Dual Approach

Whether in-plan or out-of-plan, an employer-sponsored ESA helps enable employees to save for emergencies and helps create a less stressed and more engaged workforce.

When considering either approach, plan sponsors should consider who they are trying to reach and what they are trying to achieve. A PLESA can work well to encourage both short — and long-term savings. Once participants reach the $2,500 contribution limit, any overflow of funds automatically goes into the participant’s Roth retirement savings along with any employer matching contributions.

However, because PEASA plans are directly tied to retirement savings plans, they may be less accessible to some segments of your workforce. Populations not historically in the plan may be left out or will not fully participate. At the same time, better-off segments of the workforce, namely white workers, may be best poised to take advantage of any improvement or changes in retirement savings plans.

To ensure emergency savings programs are accessible and equitable for all employees, HR pros may want to take a dual approach and sponsor both a traditional ESA and a PLESA. This will provide a choice for employees with high-liquidity needs, as well as those who are already engaged in long-term savings but may be ignoring short-term needs. The inclusive approach will also signal your company’s commitment to improving financial wellness for all employees.

The Takeaway

Emergency savings can be key to financial wellness for all of your employees. To ensure that all employees are engaged in and aware of your firm’s emergency savings benefits, HR pros may want to consider offering a combination of plans that can help workers at all levels save the money they need to handle unexpected expenses and feel more financially secure.

SoFi at Work can help you and your team implement a successful emergency savings program. We offer the tools, information and knowledge to support this and all of your financial wellness initiatives.


Photo credit: iStock/LumiNola

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