The Secure 2.0 Act Section 127 allows employers, for plan years beginning after Dec. 31, 2023, to offer their non-highly compensated employees (generally those whose compensation in 2024 is less than $155,000) the option to contribute to emergency savings accounts directly linked to their pension plans. The abbreviated name for these arrangements is PLESA. This innovative approach is designed to encourage savings and also ensures that employees have a financial cushion to rely on in times of unexpected expenses, without having to dip into their retirement funds.

Employers may automatically opt employees into these accounts in defined contribution plans at no more than 3% of their salary, and the portion of an account attributable to the employee’s contribution is capped at $2,500 (or lower as set by the employer). Since contributions are on a Roth-like basis, distributions are generally not taxable.

Automatic enrollment is not the same as mandatory participation. Employees must be given written notification before they are automatically enrolled into a PLESA program, and they have the right under federal law to opt out and withdraw their money at no charge.

Contributions to a PLESA are made on a Roth-like basis, meaning they are made with after-tax dollars. However, these contributions are treated as elective deferrals for the purpose of an employer’s retirement matching contributions, with an annual matching cap set at the maximum account balance of $2,500 or lower, as determined by the plan sponsor.

Once the cap is reached, the additional contributions can be directed to the employee’s Roth defined contribution plan (if they have one) or stopped until the balance attributable to contributions falls below the cap.

The first four withdrawals from the account each plan year may not be subject to any fees or charges. At separation from service, employees may take their emergency savings accounts as cash or roll it into their Roth defined contribution plan (if they have one) or IRA.

PLESAs must allow for a withdrawal by the participant of the account balance, in whole or in part, at the discretion of the participant, at least once per calendar month and for distribution of such withdrawal to the participant as soon as practicable from the date on which the participant elects to make such withdrawal.

Participants need not demonstrate an emergency before making a withdrawal from their PLESA.

The IRS has provided initial employer guidance in Notice 2024-22.