DOL Frequently Asked Questions: Pension-Linked Emergency Savings Accounts (Jan. 17, 2024)
The DOL has released FAQs on ERISA compliance for pension-linked emergency savings accounts added by the SECURE 2.0 Act, five days after the IRS issued initial guidance regarding anti-abuse rules for these accounts. Generally, the SECURE 2.0 Act permits a plan sponsor to amend its defined contribution plan, effective for plan years beginning after December 31, 2023, to establish plan-linked emergency savings accounts for its non-highly compensated employees that are treated as designated Roth accounts.
The FAQs provide guidance based on ERISA’s provisions on emergency savings accounts as well as fundamental ERISA rules. Here are points of interest for 401(k) plan sponsors and service providers:
- Automatic Enrollment. Plan sponsors may automatically enroll employees in emergency savings accounts, so long as employees receive written notification before actual enrollment and can opt out and withdraw their money free of charge.
- Minimum Contribution or Account Balance. Because ERISA prohibits minimum contribution or account balance requirements under emergency savings accounts, the DOL explains that this prohibits policies requiring (1) closure and distribution based on a minimum balance requirement; (2) imposition of penalties (such as fees or withdrawal right suspensions) for failure to meet specified balances; and (3) minimum required contributions per pay period.
- IRS Contribution Limit. Contributions to emergency savings accounts count towards the Code’s limit on elective deferrals ($23,000 for 2024).
- Effect of Earnings on Dollar Limitation. Employers may set account balance limits of up to $2,500 (indexed) and have flexibility to either include or exclude earnings in applying this limit. Thus, a plan could prohibit future contributions once the entire account balance (including earnings) reaches the plan’s limit. Alternatively, the plan could cap contributions at the specified limit, and any earnings that cause the account balance to exceed that limit would not cause a violation.
- No Annual Limit. The imposition of an annual limit on contributions in addition to the statutory account balance limit (e.g., an overall annual contribution limit of $5,000) is impermissible because the rules permit participants to replenish funds following withdrawals. The DOL cautions that IRS anti-abuse rules may apply.
- Deposit Timing. As with other participant contributions, employers must deposit contributions to emergency savings accounts withheld from wages as soon as the contributions can “reasonably be segregated” from the employer’s general assets but no later than the 15th business day of the month following the month in which the contribution is either withheld or received by the employer.
- Participant Certification. Participants can make withdrawals from emergency savings accounts at their discretion and need not demonstrate or certify the existence of an emergency or other need.
- Withdrawals from emergency savings accounts may be subject to reasonable fees or charges after the first four withdrawals during the plan year, as further described in the guidance. Reasonable administrative fees, expenses, or other charges are permitted, subject to ERISA’s fiduciary standards.
- There are no restrictions on the way emergency funds can be distributed (e.g., via check, debit card, or electronic transfers).
- Permissible Investments. Emergency savings account contributions can be held as cash, in interest-bearing deposit accounts, or in investments designed to preserve principal and provide reasonable rates of return, consistent with liquidity needs. Plan fiduciaries may select any prudent investment product that satisfies these criteria, regardless of the type of financial institution that issues or underwrites it, the industry in which the institution operates, or the applicable regulators. Investments with liquidity constraints (e.g., that surrender charges at the participant or plan level) are impermissible. If a plan fiduciary has designated an ERISA-compliant limited duration QDIA, that QDIA also may be designated for the investment of contributions (QDIAs that are not limited duration cannot be designated).
- Disclosures. Plan administrators may combine required emergency savings account notices with other ERISA-required notices if they are timely provided. The DOL plans to update the 2024 Form 5500s to include emergency savings account reporting requirements.
EBIA Comment: Pension-linked emergency savings accounts are intended to permit and encourage employees to save for financial emergencies. These accounts are optional under the SECURE 2.0 Act—plan sponsors who determine that the burden of providing these accounts outweighs the benefits do not have to offer them. For more information, see EBIA’s 401(k) Plans manual at Sections VIII.E (“Roth Contributions”), VIII.I (“Deposit Deadline for Participant Contributions”), XXV.D (“Selecting the Plan’s Investment Funds”), XXVI.J (“Fiduciary Protection for Qualified Default Investment Alternative (QDIA)”), and XXXI.A. (“Overview of Annual Report Requirement”).
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