/>iThe SECURE 2.0 Act of 2022 had many retirement plan provisions, including the pension-linked emergency savings account (PLESA) that lets workers contribute money to an account in a defined contribution plan that can be used to cover unforeseen financial hardships. In consultation with the Treasury Department and the IRS, the DOL recently issued guidance regarding PLESAs in the form of FAQs. There are no earth-shattering revelations in the FAQs, but there are a few nuggets to glean from them.
PLESAs allow eligible participants to contribute up to $2,500 (as Roth contributions) to an emergency savings account linked to a defined contribution plan (including a 401(k) plan). Participants can withdraw the funds monthly with no penalty and no requirement to provide documentation of an emergency. The idea is that Americans can build an emergency fund they can easily access while also taking advantage of any employer matching contribution. Because PLESA funds must be available for financial emergencies, they can only be invested in a limited range of investments designed for liquidity and preservation of capital.
The FAQs clarify that although PLESA contributions are held in separate accounts, they are still subject to all of the protections of ERISA. Accordingly, PLESA contributions must be deposited in the account at the same time as elective deferrals are deposited – on the earliest date the plan sponsor can reasonably segregate the amount from its general assets.
The law states that a plan sponsor may not impose a minimum enrollment amount or a minimum balance requirement. The FAQs clarify that a plan may not have a policy of closing an account and distributing the balance or imposing any penalties (including fees or suspension of withdrawal rights) if the account falls below a specified minimum. In addition, the FAQs state that a plan may not require a minimum contribution per pay period. However, an employer may require a participant to defer whole dollar amounts or whole percentages for PLESA contributions provided that the same rules apply to those making pre-tax or Roth elective deferrals under the plan and that participants may choose a whole dollar amount instead.
Under the law, the plan may not charge participants a withdrawal fee for the first four withdrawals from the PLESA account. After that, a plan may charge a reasonable fee for subsequent withdrawals. The FAQs clarify this prohibition would include any “fees” that were characterized by the sponsor as something else and that the employer could not set fees on withdrawals made after the first four that are designed to recoup fees for earlier withdrawals.
PLESA accounts must be invested in funds designed for liquidity and preservation of capital. The FAQs clarify that PLESA investments may have no liquidity restraints, including surrender charges. The FAQs further clarify that the plan’s qualified default investment alternatives (QDIA) are not appropriate for PLESAs unless they qualify as limited-duration QDIAs under DOL regulations.
Although this guidance is welcome, it is unclear whether employers will embrace PLESAs given the administrative burden associated with them and the difficulty of explaining them to participants.
