IRS issues Emergency Savings Account guidance

The Internal Revenue Service (IRS) issued Notice 2024-22, which provided initial guidance on emergency savings accounts linked to 401(k) plans, which were established under the SECURE 2.0 Act. Effective for plan years beginning after December 31, 2023, it allows 401(k) plans to offer (but do not require) “pension-linked emergency savings accounts” (PLESAs) to non-highly compensated employees as part of their plans.

A PLESA is a separate, designated Roth (after-tax) account that is included in a non-highly compensated employee’s regular 401(k) plan account. The purpose is to help enable and encourage employees to save for financial emergencies, separate and apart from Hardship distributions from the plan. Employees must be eligible for but do not need to contribute to the underlying plan in order to contribute to the PLESA. A PLESA may accept only employee contributions. A PLESA is subject to a maximum balance of $2,500 (as adjusted), or a lesser plan-set limit. Distributions are not subject to the 10% early distribution excise tax (unlike hardship distributions). A PLESA might be combined with an automatic contribution arrangement (optional). The PLESA has to provide that employee contributions to the PLESA be matched by the employer (if the plan has matching contributions), and made at the same rate as to those made to the employee’s underlying plan account. Recordkeeping must separately account for contributions to the PLESA and earnings.

Based on experience, I doubt that most small and medium-sized plans will implement this change because in terms of recordkeeping and work, the $2,500 maximum balance doesn’t outweigh the work in allowing the provision.

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