Will Plan Sponsors Adopt PLESAs in 2024?

As the Department of Labor and the IRS recently released additional guidance on pension-linked emergency savings accounts , the possibility of implementing the benefit has become more of a reality.

Dave Amendola, senior director of retirement at consulting firm WTW, says recordkeepers are not necessarily “chomping at the bit” to invest money in supporting these accounts without significant plan sponsor interest, but he argues that the DOL guidance, published last week in the form of FAQs, may move the needle.

“I think it’s hard to predict [uptake of PLESAs],” says Amendola in an interview with PLANSPONSOR. “But … I think that there is going to be a more significant percentage of plan sponsors who will be interested in potentially adopting this solution sooner, rather than later, now that we have more clarity.”

PLESAs, often referred to as emergency sidecar accounts, are optional accounts created by the SECURE 2.0 Act of 2022 and tied to a defined contribution retirement plan. This SECURE 2.0 provision took effect on January 1, along with the ability for employers to allow emergency withdrawals of up to $1,000 per year from one’s retirement account.

A PLESA balance is capped at $2,500, and participants may withdraw from the account at their own discretion without paying a 10% early withdrawal fee. PLESAs are only available to non-highly compensated employees, and the DOL’s notice confirmed that the threshold to qualify as “high compensated” is $155,000 for 2024.

The DOL also clarified the types of investments suitable for PLESAs, including cash, an interest-bearing account or “an investment product designed to maintain over the term of the investment the dollar value that is equal to the amount invested in the product and preserve principal and provide a reasonable rate of return, whether or not such return is guaranteed, consistent with the need for liquidity.”

Because of this DOL guidance, Amendola predicts more plan sponsors will feel there is enough information available to pursue implementing the sidecar account. However, he says there still may be a delay in the adoption rate from recordkeepers.

Even at major recordkeepers like Fidelity, Vanguard and Empower, Amendola says there is a lot of work to be done to administer this provision, including evaluating if they should create the infrastructure in-house or work with a third-party provider.

“There is the [question of]: If a recordkeeper has an emergency savings account type of solution right now, one that’s outside of the retirement plan, are they going to be quite as incentivized to get on board with this?” Amendola says.

He is curious to see how the “tension” between plan sponsors’ demand for PLESAs and recordkeepers’ ability to actually offer the solution will play out.

“In the past, when there’s been something that is available to plan sponsors and they want it enough, the recordkeepers will come around and say, ‘OK, we need to do this,’” Amendola says. “If one does it, the others probably follow suit; they don’t want to lose step.”

Amendola emphasizes that he believes that the emergency savings provisions are among the key biproducts of SECURE 2.0, and employers have the opportunity to help employees with their short-term financial challenges in a way that is tax-advantaged and incentivizes retirement savings at the same time.

By comparison, Amendola says the provision allowing participants to withdraw up to $1,000 per year from their retirement accounts is much more straightforward and might be an easier first step for plan sponsors who want to offer some sort of emergency savings.

“It’s a great provision to allow [participants] access to money that’s in their retirement plan,” Amendola says. “I think that that’s really potentially helpful. Some plan sponsors, I think philosophically, will just not want to go down that route, which I understand, but for those that do, I think it’s absolutely a good way to kind of start the process, even if you’re still evaluating the pension-linked emergency savings account.”

He adds that SECURE 2.0 also outlines provisions allowing employees to take an emergency distribution, without incurring a penalty, when facing domestic abuse or long-term care expenses. Amendola says offering these withdrawal options may be a lighter lift for plan sponsors and recordkeepers than offering a PLESA at this time.

Amendola predicts that the optional student loan matching provision in SECURE 2.0 will have more uptake in 2024 than PLESAs, due to the fact that many employers have already implemented similar student loan benefits and many recordkeepers have partnered with student loan vendors that can help implement this sort of benefit.

“It’ll be interesting to see in a few years how things shake out,” Amendola says. “I think student loan [matching] is a great provision, [but] it’s more targeted to employees with loan debt … whereas the pension-linked emergency savings account, in theory, could be any non-highly compensated employee who wants to put money away for an emergency-type situation.”