What Does SECURE 2.0 Say About Participants Replenishing an Emergency Savings Account?

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

Q: For the new Emergency Savings Accounts, I realize that contributions are limited to $2,500 unless the plan sponsor elects a lower limit. But do distributions impact this limit? In other words: Could a participant replenish an ESA after taking a distribution?

Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Currently, it does appear that participants will be permitted to make future contributions after having a distribution from their ESA account, even if the participant had already contributed $2,500. The language in the applicable section (Section 127) of the SECURE 2.0 Act of 2022 provides as follows:

‘‘(d) ACCOUNT CONTRIBUTIONS.— ‘‘(1) LIMITATION.— ‘‘(A) IN GENERAL.—Subject to subparagraph (B), no contribution shall be accepted to a pension-linked emergency savings account to the extent such contribution would cause the portion of the account balance attributable to participant contributions to exceed the lesser of— ‘‘(i) $2,500; or ‘‘(ii) an amount determined by the plan sponsor of the pension-linked emergency savings account.”

By stating that only contributions that would cause the portion of the account attributable to participant contributions to exceed $2,500 (or a lower plan sponsor-designated limit) are not allowed, as opposed to simply stating that the lifetime limit on participant contributions is $2,500, the language suggests that participant contributions WOULD be allowed under certain scenarios where withdrawals had been taken from the ESA, even if the lifetime participant contributions to the ESA had already reached $2,500.

As for what those scenarios might be and how prior distributions could affect the ability to recontribute, we do not know precisely at this point because there is nothing in the provision that explains how distributions will be allocated to contributions and earnings for the purposes of making future contributions to an ESA. However, these issues should be resolved before this provision goes into effect in 2024, as the IRS has been directed to issue ESA regulations in 2023.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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