Reasons To Avoid SECURE 2.0 Emergency Savings Accounts

Hall Benefits Law


Strategically designed, legally compliant benefit plans are the cornerstone of long-term business stability and growth. As such, HBL provides comprehensive legal guidance on benefits in M&A, ESOPs, executive compensation, health and welfare benefits, retirement plans, and ERISA litigation matters. Responsive, relationship-driven counsel is the calling card of the Firm.
SECURE 2.0 established various options for individuals to withdraw funds from their retirement accounts without penalties.
United States Employment and HR
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SECURE 2.0 established various options for individuals to withdraw funds from their retirement accounts without penalties. One such option allows plan sponsors to place funds in a separate emergency savings account for employees making less than $155,000 annually. Plan advisors often refer to these pension-linked emergency savings accounts (PLESAs) as "sidecar" accounts.

The Employee Benefits Security Administration (EBSA), a U.S. Department of Labor (DOL) division, has issued guidance to clarify several aspects of these emergency savings accounts. This guidance outlines the complexity inherent for plan sponsors in creating and maintaining these accounts for plan participants. Additionally, the Internal Revenue Service (IRS) has issued guidance on sidecar accounts, explaining how to prevent employees from using the account as a so-called "revolving door" solely to receive the employer match.

Based on the guidance from two agencies, these accounts are likely not the best option for plan administrators to choose due to the increased fiduciary and administrative burdens they present. For instance, if plan sponsors do opt for PLESAs, they must follow these rules:

  • Track eligibility of employees to ensure that highly compensated employees are not participating;
  • Abide by a fiduciary duty to ensure that participants are charged only reasonable fees in connection with the accounts;
  • Monitor contributions, which are capped at $2,500; and
  • Take on the fiduciary responsibility of selecting the appropriate investment vehicle for the accounts.

A better alternative under SECURE 2.0 might be the provision that allows a plan participant a one-time penalty-free withdrawal of up to $1,000 from their retirement savings account. This provision is easy to implement and carries no added fiduciary responsibility. It also removes the added administrative burden of creating and maintaining a separate sidecar account.

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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