IRS Provides Initial Guidance to Employers Setting Up Emergency Savings Accounts for Their Employees
Summary
The Internal Revenue Service (IRS) has issued initial guidance to help employers with implementation of pension-linked emergency savings accounts (PLESAs). Authorized under the SECURE 2.0 Act of 2022, PLESAs are individual accounts in defined contribution plans and are designed to permit and encourage employees to save for financial emergencies. Employers can offer PLESAs in plan years beginning after Dec. 31, 2023. This means that, in some cases, eligible employees could have begun contributing to a PLESA as early as Jan. 1, 2024. Subject to certain restrictions, matching contributions are made with respect to PLESA contributions at the same rate as contributions to the linked defined contribution plan. Employees who are eligible to participate in an employer’s defined contribution plan and qualify to contribute to a PLESA, if their employer offers one, may contribute to the PLESA even if they don’t participate in the employer’s defined contribution plan. In general, the maximum balance in a participant’s PLESA (attributable to contributions) is $2,500, though employers can choose to set a lower limit. PLESAs are treated as designated Roth accounts. This means that contributions are not tax deductible, but withdrawals are generally tax free. Participants can withdraw funds held in the PLESA at least once a month, as necessary.
Detail Explanation
The Internal Revenue Service (IRS) has issued initial guidance to help employers with implementation of pension-linked emergency savings accounts (PLESAs). Authorized under the SECURE 2.0 Act of 2022, PLESAs are individual accounts in defined contribution plans and are designed to permit and encourage employees to save for financial emergencies. Employers can offer PLESAs in plan years beginning after Dec. 31, 2023. This means that, in some cases, eligible employees could have begun contributing to a PLESA as early as Jan. 1, 2024. Subject to certain restrictions, matching contributions are made with respect to PLESA contributions at the same rate as contributions to the linked defined contribution plan. Employees who are eligible to participate in an employer’s defined contribution plan and qualify to contribute to a PLESA, if their employer offers one, may contribute to the PLESA even if they don’t participate in the employer’s defined contribution plan. In general, the maximum balance in a participant’s PLESA (attributable to contributions) is $2,500, though employers can choose to set a lower limit. PLESAs are treated as designated Roth accounts. This means that contributions are not tax deductible, but withdrawals are generally tax free. Participants can withdraw funds held in the PLESA at least once a month, as necessary.
Key Points
- PLESAs are individual accounts in defined contribution plans and are designed to permit and encourage employees to save for financial emergencies.
- Employers can offer PLESAs in plan years beginning after Dec. 31, 2023.
- Eligible employees could have begun contributing to a PLESA as early as Jan. 1, 2024.
- Matching contributions are made with respect to PLESA contributions at the same rate as contributions to the linked defined contribution plan.
- Employees who are eligible to participate in an employer’s defined contribution plan and qualify to contribute to a PLESA, if their employer offers one, may contribute to the PLESA even if they don’t participate in the employer’s defined contribution plan.
- The maximum balance in a participant’s PLESA (attributable to contributions) is $2,500, though employers can choose to set a lower limit.
- PLESAs are treated as designated Roth accounts. This means that contributions are not tax deductible, but withdrawals are generally tax free.
- Participants can withdraw funds held in the PLESA at least once a month, as necessary.
Pros and Cons
| Pros | Cons |
|---|---|
| Encourages employees to save for financial emergencies | Contributions are not tax deductible |
| Matching contributions are made with respect to PLESA contributions at the same rate as contributions to the linked defined contribution plan | Maximum balance in a participant’s PLESA (attributable to contributions) is $2,500 |
| Employees who are eligible to participate in an employer’s defined contribution plan and qualify to contribute to a PLESA, if their employer offers one, may contribute to the PLESA even if they don’t participate in the employer’s defined contribution plan |
Tips for the Reader 💡
- If you are an employee, check with your employer if they offer PLESAs.
- If you are an employer, consider offering PLESAs to your employees to help them save for financial emergencies.
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