Mechanics of Implementing a Sidecar Savings Account
Implementing sidecar savings accounts would allow employees to contribute towards both their emergency and retirement savings.
Linked to a participating worker’s retirement account, the tool would help workers fund a short-term savings account with after-tax contributions (The Employee Retirement Income Security Act [ERISA] does not allow pre-tax savings for emergency accounts). Once employees accrue their desired amount for emergency savings, the remaining contributions would be allocated to their defined contribution (DC) plan account, thus permitting employees to save for both short-term and long-term financial needs.
Since participants are likely to withdraw dollars from their retirement accounts when emergency expenses arise, incorporating a sidecar account may prevent workers from tapping into their DC plans.
A bipartisan Senate bill introduced in 2018 mentioned sidecar savings accounts to increase access to workplace saving while avoiding retirement account leakage. Though the bill has not passed the Senate since its announcement, firms are currently implementing after-tax approaches to increase emergency savings. In 2018, Prudential Financial, along with nonprofit organization Prosperity Now, presented an emergency savings solution utilizing payroll deductions for after-tax contributions.
To integrate such a solution, plan sponsors may be required to amend their DC plan documents, and/or update their DC plan payroll files, says Harry Dalessio, head of Institutional Retirement Plan Services at Prudential Retirement. Certain recordkeeping systems, such as Prudential’s, immediately permit participants to view emergency savings from their retirement account.
“Plan Sponsors could re-purpose an existing after-tax source or they may want to add a new after-tax source specifically for emergency savings,” he adds. “Prudential’s recordkeeping system, participant website, statements, etc. already have the after-tax source integrated so participants will be able to see their emergency savings within their [retirement plan] account.”
Setting up a sidecar—or emergency—savings account isn’t difficult for plan sponsors, it’s compliance issues behind the mechanics that can be confusing. Obscurity with these savings tools concerns employers, contends Karen Andres, director of Policy & Market Solutions and project director of the Retirement Savings Institute at The Aspen Institute.
“There’s this lack of clarity that really prevents the proliferation of experimentation,” she explains. “Employers are now just trying to feel their way into [sidecar savings], because no one wants to run afoul.”
This trepidation is mostly seen when it comes to directing money from a participant’s paycheck to the savings account. “Plan sponsors are looking to check the boxes with compliance,” says Andres. “We have multiple banking and ERISA laws on the books that just don’t really make it easy to provide this solution.”
Other employers, however, are implementing a manual route to paycheck withdrawals for emergency savings by setting up accounts with banking institutions that allow for manual withdrawals. Others are discovering automatic Fintech solutions in the workplace, and some recordkeepers are offering both the after-tax savings approach and DC plan, side-by-side.
According to Dalessio, at Prudential, employers update their DC plan payroll files to include the after-tax source. Once the plan sponsor adopts the feature, participants can change their contributions via Prudential’s mobile app or online. Dependent on the plan, set up for sidecar accounts may be simple.
“It’s very minimal because it’s part of the DC plan, so depending on how the plan is set up, the plan sponsor may only need to update its plan documents and/or payroll files,” Dalessio says.
Since sidecar and emergency savings accounts remain relatively new features in the workplace benefits space, the industry continues to navigate these tools and the regulatory issues that follow. It’s why employers have yet to see many case studies or models of the savings vehicles, according to Andres.
“Plan sponsors are still trying to figure out how to solve for multiple needs at once, and doing so in the context of regulatory and legal lack of clarity,” she says.
As the industry filters through these models and employers add sidecar savings and emergency savings accounts to their plans, Dalessio asks plan sponsors to consider certain prerequisites to offering such features. First, by adding an after-tax source, plans will be subject to Actual Contribution Percentage (ACP) testing, an annual nondiscrimination test needed to maintain qualified status under ERISA. Because ACP testing ensures highly compensated employees are not being favored by their DC plan, a sidecar savings solution can help plan sponsors pass the test since the sidecar account is geared towards the non-highly compensated employee (NHCE) population.
“However, we recommend reviewing a plan’s testing results to assess any potential impact,” Dalessio proposes.
Second, employers have the option to provide a company match on after-tax contributions. Plan sponsors should keep in mind that after-tax contributions are still subject to the IRS 415 limit, capping total DC plan contributions to $56,000 in 2019.
Lastly, and in common with any plan design changes is consulting a professional if considering a sidecar savings or emergency savings model. Dalessio concludes: “It’s up to the plan sponsor to work with appropriate ERISA counsel or a plan design consultant to ensure its plan is designed appropriately.”