The Department of Labor on Jan. 17 issued guidance for plan sponsors and participants to establish, maintain and utilize emergency savings accounts established under SECURE 2.0.
One of the 90-plus provisions in SECURE 2.0, a comprehensive retirement security package Congress passed in December 2022, allows employers to offer participants an emergency savings account as part of their defined contribution plan. Participants can be automatically enrolled at up to 3% of their pay — with the ability to opt out — and after-tax contributions are capped at $2,500. Also, participants must be allowed to take at least one withdrawal per month, and the first four withdrawals per year cannot be subject to fees.
The provision for "pension-linked emergency savings accounts" is effective for plan years beginning after Dec. 31, 2023.
After consultation with stakeholders, the department released guidance consisting of 20 frequently asked questions and responses.
The FAQs cover eligibility requirements for the emergency savings accounts, the contribution rules for plans, the procedures for distributions and withdrawals, and administration and investment parameters.
The department notes that the emergency savings account may be invested in cash, interest-bearing deposit accounts and principal preservation accounts. Contributions to an emergency account "must be invested in products designed to preserve participants' contributions while providing liquidity and a reasonable rate of return," which generally means that a plan's qualified default investment alternative, or QDIA, would not suffice, the department said.
These savings accounts will enhance retirement security by reducing retirement plan leakage and offer additional flexibility to workers, said Lisa M. Gomez, assistant secretary for employee benefits security, in a statement "Far too often, unexpected expenses, like emergency dental care, a broken refrigerator or automotive repairs, force workers to tap into their retirement savings plans through loans and hardship withdrawals simply because they don't have personal savings at the ready to absorb those unplanned expenses," she added. "Plans can offer these accounts to workers as an additional option that provides them access to needed funds when emergency situations arise."