Pension-linked emergency savings accounts (PLESAs) were established under SECURE 2.0, effective for plan years beginning after December 31, 2023, to help non-highly compensated employees save for emergencies. An employer with an individual account plan may now set up a PLESA, an individual savings account that is attached to the employer’s defined contribution plan. Eligible employees may be auto-enrolled in the PLESA at up to 3% of compensation), but auto-enrollment is not required. Employees are allowed to save up to $2,500 (as indexed) in the account (“the account balance limit”) by making Roth (after-tax) contributions, and must be allowed to withdraw all or some funds from the PLESA for any reason at least monthly. The withdrawals are not subject to the 10% early withdrawal penalty that applies to hardship withdrawals taken from 401(k) and 403(b) plans. PLESA contributions are subject to the annual limitation for elective deferrals and included with other deferrals in determining whether the annual limitation has been exceeded.
If the employer makes matching contributions in the defined contribution plan, the employer must also match contributions made to the PLESA at the same rate as in the linked plan and this is where problems can develop. Employees could manipulate the account by contributing to the PLESA to receive a matching contribution in the linked plan and then making frequent withdrawals from the PLESA after the matching contribution has been made to the linked plan. The Internal Revenue Service (IRS) issued Notice 2024-22 on January 12 to provide initial guidance regarding measures employers may use to address this issue. Last week the Department of Labor (DOL) followed up on the IRS guidance by also issuing guidance, in a Q & A format, to provide general information under ERISA regarding PLESAs.
IRS Notice 2024-22
A plan is allowed to use reasonable procedures to limit the frequency or amount of matching contributions made to a PLESA account to the extent needed to prevent manipulation of the rules. The following anti-abuse features are included in SECURE 2.0:
· Matching contributions are treated as being attributable first to the participant’s elective deferrals in the linked plan thereby potentially lowering the amount of matching contributions available for contributions to the PLESA account.
· Matching contributions cannot exceed $2,500 or a lower amount as determined by the employer.
· Withdrawals may be limited to once monthly.
A reasonable anti-abuse feature must balance the interest of participants who use it for its intended purpose with the interests of the employer in preventing abuse. Notice 2024-22 provides that employers are not allowed to implement anti-abuse procedures that:
· Allow a forfeiture of matching contributions attributable to contributions made to PLESA on account of a withdrawal from the PLESA.
· Allow suspension of contributions to the PLESA on account of a withdrawal from the PLESA.
· Allow suspension of matching contributions made on participant elective deferrals to the plan.
DOL Q&A Guidance
The Department of Labor issued FAQs providing guidance on notice requirements, fees and investment of PLESA accounts and other important issues. The DOL guidance provides that:
· Non-highly compensated employees are eligible to participate in the PLESA if they meet the age, service and other eligibility criteria of the plan (even if they are not making other deferrals.)
· Employees may be automatically enrolled in the PLESA, but they must be given written notice prior to enrollment and have the right to opt out and withdraw their account.
· A plan cannot require a minimum contribution or minimum account balance. This means that a plan cannot distribute or close an account or impose a penalty based on a minimum account balance requirement or require a minimum contribution per pay period. However, reasonable administrative procedures are allowed, e.g., contributions must be made in whole dollars or in whole percentages if such procedures are applied uniformly in the plan.
· A plan may choose to exclude earnings when determining if the $2,500 cap on the PLESA account balance limit is exceeded. Alternatively, a plan may choose to include earnings in determining when the cap on the account is exceeded.
· The PLESA account limit is not an annual contribution limit. Subject to the annual limit for deferrals to all plans, a plan cannot impose an annual limit for contributions to a PLESA since such a limit could prevent participants from replenishing funds in the account after a withdrawal.
· DOL guidance regarding when participant contributions to the plan must be remitted also applies to remittance of PLESA contributions. See 29 CFR 2510.3-102
· Separate recordkeeping is required for the PLESA.
· No explanation or certification is required from participants for withdrawal from the PLESA.
· For the first 4 withdrawals from the PLESA, the account cannot be charged with any direct or indirect fees or charges. Plans are allowed to charge reasonable fees for subsequent withdrawals only.
· Reasonable fees, expenses, or other charges for administration may be imposed directly on the PLESA or on the plan in which the PLESA is a part.
· DOL did not impose any restrictions on how distributions from the PLESA are made, therefore distributions made by check, debit card or electronic transfers are acceptable.
· PLESA contributions may be invested in any product that satisfies certain statutory criteria: an interest-bearing deposit account or an investment product that seeks to preserve principal, provide a reasonable rate of return (whether or not guaranteed), and meet liquidity requirements. Generally, the plan’s qualified default investment alternative (QDIA) and investment options designed for the PLESA cannot be the same. However, a limited duration QDIA that satisfies DOL regulations may be an acceptable investment product for a PLESA. Investment products that carry a surrender charge are not acceptable PLESA investments.
· A participant notice is required for PLESAs even if they do not have automatic enrollment. The notice may be combined with other notices required by DOL. The DOL and IRS may issue a Model Notice for PLESAs in the future. A participant’s PLESA account balance does not have to be included in pension benefit statements or other disclosures provided the PLESA notice requirement is satisfied.
· Form 5500 for 2024 will be revised to reflect specific reporting requirements for PLESAs.
The Bottom Line
Employers who have been waiting for guidance before proceeding to establish PLESAs now have many important compliance questions answered. The PLESA structure will, however, add to the plan’s administrative complexity even if few employees use it. Employers should be aware that SECURE 2.0 also permits 401(k), 403(b) and governmental 457(b) plans to distribute up to $1,000 annually as distributions due to necessary unforeseeable or immediate personal or family emergency expenses. These distributions are not limited to non-highly compensated employees. Participants may repay these amounts to their plans within 3 years, and they are also not subject to the 10% early distribution penalty when taken. This is another less complex option for employers to consider either in place of or in addition to PLESAs.
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