Compliance Confidence
Departments Issue Guidance on Pension-Linked Emergency Savings Accounts
Departments Issue Guidance on Pension-Linked Emergency Savings Accounts
Employers that sponsor a 401(k), 403(b) or governmental 457(b) plans have a new way to help employees increase their retirement account balance and their emergency savings.
Although not mandatory, the Department of Labor (DOL) and the Internal Revenue Service (IRS) recently issued guidance on pension-linked emergency savings accounts (PLESA). According to DOL FAQS, PLESAs are short-term savings accounts that “allow employees who are not highly compensated employees to make Roth contributions.”
To contribute, employees must meet all of the other eligibility requirements of the plan. Employees who contribute to their PLESA can take withdrawals without reducing retirement savings or incurring tax penalties for early withdrawal.
Can employers automatically enroll employees?
They can, however, employees must be given a written notice, be allowed to opt out, and withdraw their money at no charge. The notice must be provided at least 30 days, but no more than 90 days, prior to the first PLESA contribution. The notice must state:
- the purpose of the account
- the limits on, and tax treatment of, contributions
- any fees or restrictions associated with the account
- procedures for making contributions
- how to opt out
- the amount of the automatic contribution
- the amount a participant has already contributed
- the designated investment option
- the options available if the participant’s employment is terminated
- the options available if the employer terminates the PLESA
- what happens if the participant becomes a highly compensated employee after contributing to a PLESA
As of this writing, the DOL has not issued a model notice. A PLESA notice may be combined with other required ERISA notices.
How much can an employee contribute to a PLESA?
Contributions cannot exceed a maximum of $2,500, indexed annually for inflation. Plan sponsors may choose to include or exclude earnings on participant contributions. The FAQs state that “if a plan applies the $2,500 limit in ERISA section 801(d)(1)(a)(i) and caps participant contributions at that amount, earnings credited to the account in excess of $2,500 would not constitute a violation of the $2,500 limit.”
If the PLESA has an automatic enrollment and contribution feature, the contribution percentage must be 3% or less of the participant’s compensation. The participant may elect a higher or lower percentage. PLESA contributions do count towards the annual limit on elective deferrals and must be eligible for matching contributions at the same match rate as non-PLESA elective deferrals.
However, PLESA match contributions must be allocated to the retirement account, not the PLESA. Plan sponsors may institute “reasonable procedures” to limit the frequency or number of matching contributions in order to prevent manipulation of the plan’s matching contribution rules. Unfortunately, neither the DOL FAQs nor the IRS Notice include examples of a reasonable procedure.
Plan sponsors can remove the PLESA option from their plan at any time, notwithstanding typical anti-cutback rules.
When can participants take withdrawals?
Employers must allow participants to make withdrawals at least once per calendar month. Unlike hardship withdrawals, participants do not need to certify the existence of any need or event to withdraw funds.
PLESA withdrawals are never subject to the typical 10% penalty on early withdrawals. The first four PLESA withdrawals in a plan year cannot be subject to any fees or charges, directly or indirectly. Subsequent withdrawals may be subject to reasonable fees.
Can contributions be invested?
Yes. Contributions must be held as cash, either in an interest-bearing account or an investment product designed to provide a reasonable rate of return. ERISA fiduciary requirements on the selection of prudent investment options apply. Generally, the plan’s QDIA cannot be used as the default investment on PLESA funds.
What happens if an employee is terminated?
If an employee is terminated, they may either take the full amount in the account as a withdrawal or roll the contribution over into a new PLESA account.
Are there other administrative requirements?
Yes. First, plans offering a PLESA must include the feature on their Form 5500. The DOL is working on updating Form 5500 for 2024 to add a PLESA feature code. Second, a plan must separately account for participant PLESA contributions and earnings. This means separate recordkeeping for each PLESA.
Staying apprised of compliance requirements in the ever-changing landscape of healthcare reform can be challenging. OneDigital’s Compliance Consulting team is here to help clients remain in compliance year-round, providing tools and resources for compliance peace of mind. Reach out to your OneDigital representative if you have any questions.
Looking for additional information on the rules and regulations that could affect your organization? Check out the 2024 HR Guide to Compliance.