IRS Guidance on SECURE Act 2.0’s New PLESA Savings Accounts

by Prof. Robert Bloink and Prof. William H. Byrnes

Starting in 2024, employers are permitted to offer a new type of employment benefit designed to encourage employees to save for emergencies. The SECURE Act 2.0 allows employers to offer emergency savings plans that are formally linked to an employer-sponsored retirement plan. These pension-linked emergency savings accounts, or PLESAs, provide a tax-advantaged emergency savings option. Because this savings account is entirely optional and the law itself provided only bare-bones guidance, the accounts have yet to gain traction with most employers. The IRS and DOL have now released initial guidance designed to offer clarity to employers who wish to offer this new type of employment benefit—and to help employers prevent employees from manipulating the PLESA option solely to receive an employer matching contribution.

PLESAs: Background

Employees can choose to participate in a PLESA if they are eligible to participate in the retirement plan (regardless of whether they actually contribute to the retirement plan).

PLESAs are generally treated as Roth accounts. While employees contribute with after-tax funds, those funds generally grow tax-free and are withdrawn tax-free when the employee needs the funds to cover an emergency. While PLESAs are intended to help employees cover emergencies, employees are not required to provide evidence of an emergency to take a withdrawal.

PLESA account limits are limited to $2,500, although employers can elect to set lower limits.

Pursuant to joint IRS and DOL guidance, employers have two options for implementing the $2,500 account value limits. Employers can take an exclusion approach, so that earnings that exceed the $2,500 limit do not cause the account to become disqualified. In the alternative, employers can provide that the account value, as a whole, can never exceed $2,500, so that earnings are counted in determining the maximum balance that a participant can accumulate.

Employees must be permitted to make withdrawals at least once a month. The IRS has also announced that no fees can be charged for the first four PLESA withdrawals in any given year. After the fourth withdrawal, reasonable fees can be charged (the rule does not prohibit fees associated with account administration generally).

Employers cannot impose an annual limit on employee contributions (for example, employees will be permitted to replenish the account if they deplete the balance throughout the year even if the annual contributions for the year exceed $2,500—the focus is on the account balance at any given time).

As with ordinary 401(k) elective deferrals, employers must transfer amounts withheld from employee wages as soon as reasonably possible, but no later than the 15^th business day of the month immediately following the month in which the contribution is either withheld or received by the employer.

While employers may automatically enroll employees in PLESAs, they are not required to implement auto-enrollment procedures (employees have the right to opt out and withdraw any automatic contributions if they are automatically enrolled).

IRS Guidance on Employer Matching Contributions

If an employer makes matching contributions to the related defined contribution plan, the employer must make matching contributions on behalf of an eligible participant based on their contributions to the PLESA at the same rate as any other matching contributions made based on the participant's elective contributions by (the matching contribution will be made to the individual's retirement account, not the PLESA).

The matching contributions cannot exceed the maximum account balance under Section 402A(e)(3)(A) for the plan year. Matching contributions are first treated as being attributable to the individual's elective deferrals for purposes of determining the limit on the employer match.

Recent IRS guidance focuses on preventing employees from manipulating the employer matching requirements by funding the PLESA only to receive an employer match, taking a distribution and then re-funding the PLESA to get another match. Although employers can set lower limits on PLESA account balances and limit withdrawals to once per month, many employers remained concerned about employees manipulating the PLESA rules solely to get the employer match.

While reasonable anti-abuse procedures are permissible to limit the frequency or amount of employer matching contributions, the IRS did not offer many specifics on procedures that will be deemed “reasonable”. The guidance provides that a reasonable anti-abuse procedure balances the interests of participants in funding the PLESA for its intended purpose with the plan’s interest in preventing manipulation of the matching rules.

The IRS did offer examples of anti-abuse procedures that will be deemed unreasonable. Employers cannot provide that matching contributions are forfeited if the employee withdraws funds from the PLESA. Similarly, employers cannot suspend the employee’s right to fund the PLESA due to withdrawals and cannot suspend matching contributions made on account of participant elective deferrals to the underlying defined contribution plan.

Conclusion

The IRS has requested comments from employers designed to develop additional guidance on anti-abuse procedures that would be deemed reasonable. Thus, as always, employers should pay close attention for additional PLESA guidance going forward.

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