Contributing to a company 401(k) or 403(b) plan is vital to employees’ retirement readiness. The most common tool employers use is automatic enrollment, which results in increased savings for all classes of employees. However, it can be difficult for employees who rely on each paycheck to access their retirement savings for unexpected emergencies.
Loans and hardship distributions are usually available. Unfortunately, these cause an administrative burden to the employer and result in fees charged to employee accounts. Additionally, borrowers must repay loans, which can cause further financial detriment.
The SECURE 2.0 law in 2022 addressed this problem by introducing the Pension-Linked Emergency Savings Account (PLESA).
Starting in 2024, all 401(k), 403(b), and governmental 457(b) plans can choose to include PLESAs. These accounts are for Non-highly Compensated Employees (earning $150,000 or less in 2023) to save up to $2,500 after taxes.
This amount is indexed annually. Contributions to a PLESA count toward the overall deferral limit ($23,000 in 2024). They are also included for calculating the employer matching contribution.
You can take money out of PLESAs whenever you need it, for any reason. But plan sponsors may put certain administrative limits on distribution requests.
The money in a PLESA cannot be held in a traditional investment, like a mutual fund. It must be in cash, an interest-bearing account or an investment designed to preserve capital.
Employees can be automatically enrolled into a PLESA, and automatic enrollment is proven to create savings.
Once the account reaches $2,500, the system can automatically direct additional contributions to the participant’s Roth account.
If employees automatically enroll into the PLESA, they will accumulate $2,500 that is accessible to them at any time. This will reduce plan loans and hardship distributions, easing the burden on the plan sponsor and employee fees.
The IRS and DOL will release rules explaining parts of the PLESA rule by December 29, 2023. To date, they have not released any regulations. The investment recordkeepers will wait until the regulations come out before making PLESAs available through their participant platforms. So, even if you desire a PLESA now, you will likely have to wait a few months into 2024.
If your company has a 401(k), 403(b), or governmental 457(b) plan, discuss the PLESA concept with your management team and determine if it could benefit your employee retirement program. You will likely have the opportunity during 2024 to add these accounts to your plan.
Be on the lookout for information from your employer regarding changes in the retirement plan for 2024. It is possible that your employer is adding a PLESA. You may have to elect to contribute to this account, or it could be an automatic enrollment. Pay attention to supplemental notices sent by the employer or investment recordkeeper.
MAI Retirement is a division of MAI Capital Management, LLC (“MAI”).
MAI is an investment adviser registered with the Securities and Exchange Commission.
MAI does not provide legal or tax advice to retirement plans. Please consult your legal or tax advisor before making any legal or tax decisions.