Have you considered the new Pension-Linked Emergency Savings Account (PLESA) benefit to add to your retirement program? If you're among the 63% of Americans who lack sufficient savings to cover one month of expenses, this new benefit may likely sound very appealing.
PLESA benefits are new but could be an interesting strategy in driving financial well-being in your workforce; understanding how to leverage them may significantly improve employee financial security.
The Importance of Emergency Savings
Emergency savings are a lifeline. Being able to cover unexpected expenses or financial shocks can mean the difference between a temporary setback and a prolonged economic crisis.
Disturbingly, statistics reveal only 63% of Americans possess enough emergency savings to cover at least one month's worth of expenses. This savings deficit isn't just stress-inducing; it can also lead to debt, postponed retirement, and even health complications.
A PLESA offers a possible solution to this challenge. Acting as linked emergency savings accounts established as part of an individual’s employer-sponsored retirement plan, it can provide the financial cushion needed to weather financial storms. Contributing to a PLESA can build a separate pool of savings specifically for emergencies, relieving anxiety and promoting financial security.
Understanding Your PLESA Benefits
To fully leverage your PLESA benefits, you need to understand the program's specifics. Established under the SECURE 2.0 Act, a PLESA is a unique type of savings account designed to promote emergency savings. It presents several unique features that differentiate it from typical savings or retirement accounts.
Employees who have access to a PLESA may save up to $2,500 or build a total balance of up to $2,500. All contributions are considered Roth contributions, and there will be no tax deferral benefit.
If you’re an employer, consider activating the auto-enrollment feature associated with the PLESA. Doing so may enable your employees to save as much as 3% of their paycheck towards emergencies.
A significant feature of a PLESA is the absence of a minimum contribution or account balance requirement, as the Internal Revenue Service (IRS) outlines, making it accessible to all employees, regardless of income level.
The PLESA may have some fees, but they are generally not excessive, as excessive fees may deter an individual’s desire to save and may erode the value of their emergency savings over time. This feature ensures that every contribution, no matter how small, can help build their emergency reserve.
Also, PLESA contributions are made after tax, and withdrawals are generally tax-free. As specified in the Internal Revenue Code, this tax treatment allows contributions to be made after tax, with tax-free withdrawals for emergencies. In contrast, early withdrawals from conventional retirement accounts like a 401(k) or IRA often come with taxes and penalties.
A PLESA is not meant to replace an individual's retirement savings plan but rather to complement it by providing liquidity for short-term needs without tapping into long-term retirement savings plans.
SECURE 2.0 also allows employers to match employee PLESA contributions; however, those employer contributions flow into the associated retirement account and not the PLESA itself. The specifics of employer matching contributions can vary, so it's crucial to understand your employer's policy.
How to Leverage Employer Contributions
Because of the unique relationship between PLESAs and retirement savings accounts, employer matching contributions can substantially accelerate the growth of your retirement savings. Matching contributions are free money that your employer adds to your retirement account, typically as a percentage of your own contributions. For example, your employer might match 50% of your PLESA contributions up to a certain limit.
To fully leverage this benefit, aim to contribute at least enough to your PLESA to get the full employer match. For instance, if your employer matches 50% of your contributions up to 3% of your salary, try contributing at least 6% to your PLESA. That way, you're effectively getting a 50% return on your money, a deal you won't find anywhere else.
Keep in mind, though, that employer contributions to a PLESA aren't mandatory under SECURE 2.0; they must simply follow the rules of the existing retirement plan design. So, if your employer doesn't offer matching contributions, don't let that discourage you from contributing to your PLESA. Every dollar you save is a step towards greater financial security.
Strategies for Consistent Saving
Building your emergency account through a PLESA is usually an ongoing process, not a one-off task. As of May 2023, 56% of employed Americans contribute to their emergency savings accounts at least monthly. This consistency is the key to growing your savings over time.
Here are a few strategies for consistent saving:
- Automate your contributions: Set up automatic payroll deductions to your PLESA. This automates the saving process and ensures you regularly contribute to your account.
- Start small, then increase gradually: If you can't afford to save much now, start with what you can afford and aim to increase your contributions over time.
- Save windfalls: Whenever you receive a bonus, tax refund, or other financial windfall, consider temporarily increasing your contribution to your PLESA.
Adopting these strategies can help you build a robust emergency saving account over time, providing a solid financial foundation and peace of mind.
Weighing the Option of Out-of-Plan Emergency Savings Accounts
While PLESA funds provide a structured approach to building emergency savings, it's not the only option. Out-of-plan emergency savings accounts exist and could be a viable alternative depending on your circumstances.
Unlike PLESA, which must be linked to a defined contribution plan, these non-ERISA accounts are not tied to your employer or retirement savings plans. They're standard or short-term savings accounts that you open and manage independently. This gives you flexibility, as you may be able to contribute more and choose a financial institution, account type, and saving strategy that suits your needs.
Further, since they are not associated with participant contributions like a workplace retirement plan, you have control over how much and how often you contribute to these emergency savings accounts.
Out-of-plan accounts may not offer the same tax benefits as a PLESA, but there are also fewer restrictions and quicker access to funds thanks to their underlying account structure.
Additionally, employers may choose to contribute directly into an out-of-plan or non-ERISA emergency savings account rather than applying those contributions to retirement. As a result, you may be able to build those emergency savings even more quickly.
When choosing between a PLESA and an out-of-plan account, consider factors such as:
- Your saving habits: If you’re comfortable with accessing your PLESA with a bit of delay and prefer automatically rolling over excess contributions to your retirement, a PLESA may be a better fit. If you need more immediate access or are focusing on more near-term goals, consider non-ERISA emergency savings.
- Your employer's contribution match: If your employer offers matching contributions into your retirement account associated with your PLESA, it's worth considering this benefit. Remember, this is essentially free money that can help grow your emergency savings more quickly. But if you have an out-of-plan option, your employer contribution may directly go into your emergency fund, making it even easier to build emergency savings.
- Your tax situation: The after-tax contributions and tax-free withdrawals of a PLESA carry a minor tax advantage, which may ultimately only be $20 to $30 as a result of the investment restrictions on PLESAs. Ask a financial planner whether your Roth contribution limits may also be impacted as a result of your PLESA contributions.
Considering PLESAs for a Financially Secure Tomorrow
Maintaining an emergency savings account is crucial to financial security. With the introduction of PLESAs, employees now may have a structured and tax-efficient way to build their emergency savings, potentially benefiting from employer-matching contributions.
However, maximizing your PLESA benefits requires understanding the specifics of the program, leveraging employer contributions, and committing to consistent savings. Additionally, it's vital to consider all your options, including out-of-plan emergency savings accounts, and choose the one that best suits your needs and circumstances.
By taking these steps, you can turn your financial benefit strategy, which may have been previously only focused on retirement, into something that meets the needs of everyone’s broader journey toward financial well-being. Every dollar saved today is a step towards a more secure and stress-free future.