DOL, IRS issue guidance on DC plan emergency savings accounts 

March 8, 2024

Recent Department of Labor (DOL) and IRS guidance address many — but not all — key implementation issues for the new pension-linked emergency savings accounts (PLESAs) under the SECURE 2.0 Act (Div. T of Pub. L. No. 117-328). DOL’s guidance takes the form of 20 wide-ranging FAQs posted on the agency’s website covering multiple aspects of PLESA administration. IRS’s guidance in Notice 2024-22 focuses on reasonable measures sponsors can take to limit employees’ manipulation of the employer match on PLESA contributions. IRS is accepting written comments on its notice through April 5, and both agencies have indicated that more PLESA guidance is coming.

SECURE 2.0 allows sponsors of defined contribution (DC) plans (such as 401(k) or 403(b) plans) to offer PLESAs to nonhighly compensated employees (NHCEs) for plan years starting in 2024. PLESAs are designated Roth accounts, meaning contributions are taxed when made. Regardless of when taken, withdrawals are treated like qualified Roth distributions, allowing participants to withdraw their contributions and earnings tax-free. PLESAs can accept only participant contributions. However, SECURE 2.0 requires sponsors that match employees’ DC plan elective contributions to also match PLESA contributions at the same rate. For an in-depth discussion of the statutory PLESA provisions, see SECURE 2.0 offers new alternative for in-plan emergency savings (July 7, 2023).

DOL’s FAQs cover a wide range of issues, including PLESA eligibility and participation, contributions, withdrawals, investment of accounts, notices and disclosures, and reporting requirements.

SECURE 2.0 says that an eligible participant for PLESA purposes is an individual who “meets any age, service, and other eligibility requirements of the plan” and “is not a highly compensated employee.” In two separate FAQs, DOL appears to interpret this language to mean that any NHCE who’s eligible to contribute to the retirement portion of the plan must also be eligible to contribute to the PLESA, but plans could have more generous PLESA eligibility requirements. However, the FAQs aren’t entirely clear, so clarifying guidance would be helpful.

SECURE 2.0 allows (but doesn’t require) employers to auto-enroll employees into a PLESA. The default contribution rate can’t exceed 3% of pay, and participants must receive advance notice and be able to opt out of participation (or choose a different PLESA contribution rate). One of DOL’s FAQs reiterates these statutory requirements and emphasizes that PLESA participation cannot be mandatory.

SECURE 2.0 says a participant can’t contribute to a PLESA once the portion of the account attributable to contributions exceeds $2,500 (this amount will be indexed starting in 2025). Sponsors have the option to set a lower limit.

Impact of earnings on limit. DOL explains that sponsors can choose whether to count earnings on PLESA contributions toward the account limit. A plan could take what DOL calls the “inclusion approach,” which would count earnings toward the limit and require contributions to stop once the total account balance hits $2,500. Alternatively, the plan could take the “exclusion approach,” which would exclude earnings from the limit and require contributions to stop once the portion of the account attributable to contributions reaches $2,500. The exclusion approach appears to require the plan administrator to determine the portions of a withdrawal attributable to contributions and earnings, although the guidance doesn’t explicitly state this. This determination would be necessary after any partial withdrawal for the administrator and participant to know how much more the participant could contribute before reaching the limit.

Annual contribution limit prohibited. One FAQ says that plans can’t apply the account limit as an annual contribution limit (e.g., a plan can’t limit an employee’s PLESA contributions to $2,500 per year). DOL believes doing so might prevent participants from replenishing their PLESA after a withdrawal, defeating the emergency-savings nature of the account. Some sponsors may have wanted to take such an approach to simplify administration.

However, DOL notes that PLESA contributions count toward the annual limit on elective contributions under Internal Revenue Code (IRC) Section 402(g) ($23,000 in 2024). So if an employee’s total elective and PLESA contributions reach the 402(g) limit in a given year, both contributions must stop even if the PLESA account balance is less than $2,500.

Minimum contributions and balances also prohibited. SECURE 2.0 says PLESAs may not have a minimum contribution or account balance requirement. DOL interprets this prohibition to mean plans can’t force closure or distribution of a PLESA or impose penalties (such as fees or suspended withdrawal rights) on an account that falls below a specified balance. Nor can plans require a minimum contribution per pay period. However, the prohibition on minimum contributions doesn’t prevent plans from applying reasonable administrative practices, such as requiring PLESA contributions in whole dollars. Plans can also require contributions in whole percent increments, as long as that requirement is applied uniformly to all other contributions to the DC plan and participants can opt to contribute in whole dollar amounts instead.

Timely deposit of contributions. SECURE 2.0 says PLESA distributions must be made “as soon as practicable from the date on which the participant elects to make such withdrawal.” An FAQ clarifies that the same timing rules that apply for depositing an employee’s elective contributions also apply to PLESA contributions. This means a sponsor must remit contributions withheld from an employee’s wages to the PLESA on the earliest date the contributions can reasonably be segregated from the employer’s general assets, but no later than the 15th business day of the month immediately after the month in which the contribution is withheld or received by the employer.

Separate accounting and recordkeeping. SECURE 2.0 requires plans to account separately for PLESA comtributions and any earnings, as well as maintain separate recordkeeping for each participant's PLESA. DOL explains that plans can satisly this requirement by pooling employees' PLESA funds in an omnibus account that separately tracks each employee's contributions and earnings.

SECURE 2.0 says PLESA contributions must be held as cash, in an interest-bearing deposit account. or in an investment product designed to preserve principal and provide a reasonable rate of return, whether or not such return is guaranteed, consistent with the need for liquidity. The investment product must be offered by a federally or state-regulated financial institution and may be subject to reasonable restrictions, as permitted by DOL.

DOL confirms that plan fiduciaries can select any prudent investment product that satisfies these criteria — regardless of the type of financial institution that issues or underwrites the product, the industry in which the financial institution operates, or the principal regulators of the product or its provider. However, the agency cautions that investment products with liquidity constraints (such as surrender charges) generally won’t satisfy the statutory requirements. A plan’s qualified default investment alternative (QDIA) generally wouldn’t satisfy the statutory criteria unless it’s a “limited duration” QDIA under DOL Reg. Section 2550.404c-5(e)(4)(iv).

SECURE 2.0 provides that plans must allow withdrawals from a PLESA “in whole or in part at the discretion of the participant” at least once per calendar month.  

Substantiation not required. DOL explains that this provision doesn’t require participants to demonstrate or certify that they have an emergency or other need to withdraw funds from a PLESA. However, DOL stops short of saying that SECURE 2.0 unequivocally prohibits plans from requiring substantiation. Requiring substantiation arguably is incompatible with the purpose of PLESAs, which DOL describes as providing “immediate access to savings to respond to unexpected financial needs” at the participant’s discretion. Sponsors considering requiring substantiation for PLESA withdrawals may want to consult with legal counsel.

No limits on form of distribution. SECURE 2.0 doesn't limit how plans can make PLESA distributions (for example, as paper checks, debit cards and electronic transfers). Although the act gives DOL the authority to impose administrative restrictions, the agency has decided not to do so.

SECURE prohibits plans from charging fees on a participant’s first four withdrawals in a plan year; however, plans can charge reasonable fees for any additional withdrawals. The FAQs don’t clarify what would be a reasonable fee for withdrawals after the first four. However, one FAQ warns against inflating fees for withdrawals after the first four to help pay for the earlier withdrawals.

DOL separately confirms that plans can impose reasonable administrative fees, expenses or charges unrelated to withdrawals on either participants’ PLESAs or retirement accounts in the underlying DC plan. Either approach would be subject to ERISA’s general fiduciary standards and existing guidance on fee allocation (Field Assistance Bulletin 2003-03, May 19, 2003).

SECURE 2.0 requires administrators of plans offering PLESAs to give employees a notice containing certain information listed in the statute. Employees must receive the notice 30 to 90 days before the first PLESA contribution — whether made by auto-enrollment or otherwise — and then annually thereafter. DOL and Treasury are considering whether to include a model notice for this purpose in future guidance. DOL says that administrator may combine this notice with other plan notices, including the QDIA, automatic enrollment and 401(k)/(m) safe harbor notices. DOL confirms that information about a plan’s PLESA feature needn’t be included in employees’ quarterly pension benefit statements or the plan’s annual fee disclosure.

PLESAs are also subject to annual reporting. DOL is working on updating the 2024 Form 5500 series and instructions for this purpose.

Notice 2024-22 provides more targeted guidance on the SECURE 2.0 provision that allows — but doesn’t require — sponsors to implement reasonable anti-abuse rules to prevent employees from manipulating the plan’s matching contribution rules. When employees make elective contributions, their ability to withdraw those contributions is limited by the IRC’s distributable event rules. But SECURE 2.0 says employees must be able to withdraw their PLESA funds at least once per month. This potentially creates an opportunity for employees to contribute to their PLESA just to earn the match, then withdraw the PLESA contributions shortly thereafter.

Statutory safeguards. In the notice, IRS says employers may find that certain statutory requirements for PLESAs sufficiently safeguard against match manipulation. For example, employers must attribute any match to an employee’s elective contributions first, with PLESA contributions matched only to the extent the employee hasn’t already earned the full match. SECURE 2.0 also caps the total PLESA match each plan year to the maximum allowable PLESA account balance. A sponsor’s decision to set a lower PLESA account limit would also cap the annual match on PLESA contributions at that lower amount. So once an employee has received the maximum match on PLESA contributions during a year (i.e., $2,500 or a lower limit set by the plan), the employee can’t earn any additional PLESA match for the rest of the year, even if the employee draws on the PLESA account and then makes additional contributions.

Prohibited restrictions. An employer that wants more restrictions can set only reasonable anti-abuse rules that balance its interest in preventing match manipulation with employees’ interests in using PLESAs for the intended purpose. The notice says that the following restrictions wouldn’t be reasonable:

• Forfeiture of the PLESA match after a withdrawal of PLESA funds
• Suspension of PLESA contributions after a withdrawal of PLESA funds
• Suspension of matching contributions on elective deferrals to the underlying DC plan

• FAQs: Pension-linked emergency savings accounts (DOL, Jan. 17, 2024)
• News release: US Department of Labor issues guidance on new emergency savings accounts (DOL, Jan. 17, 2024)
• Notice 2024-22 (IRS, Jan. 12, 2024)
• News release: IRS provides initial guidance to employers setting up emergency savings accounts for their employees (IRS, Jan. 12, 2024)
• Div. T of Pub. L. No. 117-328, the SECURE 2.0 Act (Congress, Dec. 29, 2022)

• SECURE 2.0 offers new alternative for in-plan emergency savings (July 7, 2023)
• User’s guide to SECURE 2.0 (regularly updated)