IRS Issues Guidance on Emergency Savings Accounts

The SECURE Act 2.0 passed into law in December 2022 calls for several updates to plan operations. Due to the comprehensive nature of the legislation, many updates are set to phase in over five years. Provisions effective in 2024 include introducing Starter 401k plans, student loan matching payments, deferral failure corrections, and introducing a new emergency savings account (PLESA). These accounts are limited to $2,500 in annual contributions and the first four withdrawals are tax-free. While regulations guiding all new provisions have yet to be issued, the IRS recently released Notice 2024-22 which provides important details on PLESA anti-abuse rules. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

What is a PLESA?

These are short-term savings accounts established and maintained within a defined contribution plan. Employees who are not highly compensated are permitted to make ROTH contributions and can withdraw funds for various emergency purposes. This is an attractive option for many because there are no tax penalties ordinarily associated with early withdrawals from a retirement account. If an employer offers this plan type, participation is permitted regardless of whether an employee participates in the retirement plan.

Guidance Highlights – Anti-Abuse Rules

The Notice includes anti-abuse rules to prevent the manipulation of matching contributions.

• Order of Matching Contributions – Matching contributions made under the plan are to be attributed to a participant’s elective deferral other than PLESA contributions. This means elective deferrals to the defined contribution plan will be matched first and lower the availability of matching funds for contributions made to the PLESA.
• Limitation on Annual Matching Contributions – The guidance also states that matching contributions to a PLESA cannot exceed the maximum account balance of $2,500 for the plan year. It is important to note that plan sponsors can elect to set a lower limit than $2,500. A lower amount would lower the cap on required annual matching contributions.

Some businesses may find these broad rules sufficient to counteract bad actors. However, employers offering a PLESA may implement additional limitations to the frequency or amount of matching contributions. The prime concern is preventing participants from taking distributions that maximize matching contributions while maintaining a low account balance. A plan sponsor can decide to implement additional procedures, but only those specifically designed to prevent rule manipulation.

Reasonable Anti-Abuse Procedures

Reasonable procedures are those that balance the participant’s interest with those designed to prevent manipulation. However, a plan sponsor may implement additional procedures to further deter such activity. Rather than providing specific examples of reasonable procedures that can be implemented, the guidance provides examples of procedures that are considered unreasonable. These include:

• Forfeiture of matching contributions – A plan may not provide that a matching contribution already made on account of a participant to the PLESA will be forfeited because of a participant’s withdrawal.
• Suspension of participant contributions – A plan may not suspend a participant’s ability to contribute to the participant’s PLESA on account of a withdrawal.
• Suspension of matching contributions on participant contributions to the underlying defined contribution plan – A plan may not suspend matching contributions made on account of participant elective deferrals to the underlying defined contribution plan.

Contact Us

Emergency savings accounts are an important option for participants facing difficult challenges or circumstances. Yet there is a potential for abuse specifically as it relates to matching contributions. The details outlined above provide basic guidance on preventing such activities along with additional rule-making guidance. If you have questions about the information outlined above or need assistance with your next 401k plan audit, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.