Pension-Linked Emergency Savings Accounts: Help Employees Save for a Rainy Day

Employer-sponsored PLESAs encourage employees to save for emergencies by allowing them to put aside a portion of their pay for that purpose.

Authorized under the SECURE 2.0 Act of 2022, pension-linked emergency savings accounts are individual accounts in defined contribution plans. They are designed to permit and encourage employees to save for financial emergencies.

These are still very new; employers have only been able to offer them 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. The IRS notes that 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. The rules are still new, so be sure to get guidance on setting one up.

How do employer-sponsored PLESAs work?

The PLESA is not a standalone plan, it must be tied to the company’s defined contribution retirement plan.

The PLESA is funded similar to traditional 401(k) contributions except that the employee’s wages contributed to the PLESA are taxable.  The money can be used for immediate financial needs. There are no fees for withdrawing the funds and the earnings are tax free. Upon separation of employment, the employee has the option of withdrawing the funds or rolling them into a Roth account.

If you already have a defined contribution retirement plan or are considering setting one up, you may want to add the PLESA option. Contact R&A or your plan administrator for more information.