By: Lyndsey Barnett and Michaela Taylor*
As we have mentioned in previous insights, the SECURE 2.0 Act, which was passed in December, has ushered in new ways for employers to assist their employees in building savings for the future. Two of these optional provisions specifically address expenses for emergencies.
Last year, the Consumer Financial Protection Bureau issued a report noting that in 24% of Americans had no money at all for an emergency expense, while 39% have less than one month of income saved. Some of these individuals who are enrolled in a retirement plan may take a hardship distribution from their retirement accounts if unexpected expenses arise; however, many of these individuals have started limiting or pausing their retirement contributions altogether. According to another report issued by U.S. News and World Report, 50% of Americans have had to pause saving for retirement at some point in 2022, while 41% have stopped contributing to retirement funds.
To address potential emergency events, SECURE 2.0 provides employers the option to allow employees to take a personal expense distribution from the plan once per year for up to $1,000. Unlike other hardship distribution, this distribution will not be subject to the 10% early withdrawal penalty and may be repaid to the plan within 3 years of the date of distribution.
The other new optional provision allows non-highly compensated employees to automatically allocate a percentage of their income, up to $2,500 in total, to an account in their retirement plan to pay for emergency expenditures. This provision is only available in individual account-based retirement plans (e.g., 401(k) plans). Adding an emergency savings account into your retirement plan will allow employees to tap into an option outside of their traditional retirement funds to be used for unexpected expenses. The funds are taxed at the time of contribution and are available to the employee whenever they are needed for any reason.
Like other provisions we have discussed, this savings plan is optional, and plan sponsors may remove the feature at any time. However, if implemented, participants must have the right to make monthly withdrawals from the account, and there may not be any fees on the first four withdrawals each year. The amounts must be held in trust and must be invested in an interest-bearing deposit account or an investment vehicle designed to preserve principal. Contributions to the emergency savings account must be included when determining any matching contribution due to the participant under the plan and plan sponsors can include an automatic enrollment provision (but with significant restrictions).
The Act requires the Treasury to issue regulations within one year of enactment. These provisions are effective for plan years beginning on or after December 31, 2023, which gives plan sponsors time to decide whether to implement and gives recordkeepers time to get their systems ready. If you have any questions about this, or any portion of SECURE 2.0, please contact any of Graydon’s Employee Benefits team.
