Compliance News | February 7, 2024
The DOL has provided guidance on pension-linked emergency savings accounts (PLESAs), a special type of short-term savings account within a 401(k) or 403(b) account. The SECURE 2.0 Act authorized PLESAs to encourage elective contributions to 401(k) or 403(b) accounts because the limited ability to access money from those accounts in the event of an emergency has tended to discourage those who are lower paid from making elective contributions and thereby receiving an employer match.
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PLESAs are subject to both DOL and IRS guidance. Last month, the IRS published guidance on the abuse provisions governing PLESAs, which we summarized in our January 18, 2024 insight that also provides background on how a PLESA works.
The DOL guidance, which was issued as FAQs, addresses:
Plan sponsors have discretion whether to establish a PLESA as part of 401Ik) or 403(b) plan. A PLESA allows “non-highly compensated employees” to make Roth contributions and receive matching contributions. All ERISA protections apply to participants in the PLESA.
A plan sponsor may automatically enroll eligible individuals in a PLESA. This is not mandatory participation, as employees must be given written notification before they are automatically enrolled, and must have the right to opt out and withdraw their money (at no charge).
All contributions to PLESAs must be Roth contributions. A PLESA cannot have a minimum contribution requirement, but the plan sponsor can require that contributions be made in whole dollars. A PLESA can also require that percentage-based contributions be at least 1 percent and be made in whole percent increments. A PLESA cannot have a minimum balance requirement or assess penalties if the balance falls below a specified amount.
The automatic enrollment percentage must be no more than 3 percent unless the participant elects a higher or lower percentage. The account may not exceed $2,500 (indexed). The plan sponsor can choose whether to include or exclude earnings in testing whether the account is over $2,500. Amounts contributed to the PLESA count against the maximum 401(k) contribution limit ($23,000 plus catch ups for 2024).
If a participant makes a withdrawal from the PLESA account, the participant must be allowed to replenish it up to the $2,500 (or $2,500 plus earnings) limit. The plan sponsor may not set an annual limit on PLESA contributions.
Plan sponsors must remit withheld elective contributions to the plan under the same rules that apply to withheld 401(k) elective contributions.
If a 401(k) plan otherwise provides matching contributions for elective employee contributions, the plan must provide matching contributions for PLESA contributions.
Participants may withdraw money from their PLESAs at any time and need not certify or otherwise show an emergency need. Plan sponsors must allow withdrawal as frequently as once per calendar month. Plans can allow more frequent withdrawals, but not less frequent withdrawals.
Plan sponsors may not impose fees, directly or indirectly, on the first four withdrawals in a plan year. Reasonable fees can be charged on subsequent withdrawals during the plan year. The DOL has determined it will not impose, at this time, restrictions on the manner (e.g., checks, debit cards or electronic transfers) in which PLESA funds may be distributed.
Although fees may not be imposed on the first four withdrawals, PLESAs may be subject to charges associated with administration, either directly on the PLESA or on the associated 401(k) account.
PLESAs must be held as cash, in an interest-bearing deposit account, or in 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 or return.” The DOL will allow the plan fiduciary to select any prudent investment product that satisfies the above criteria. The FAQs note that a product that has liquidity restraints, such as surrender charges, is generally incompatible with these objectives.
Plan sponsors must make a disclosure to participants within 30 to 90 days before the first contribution, including any contribution under an automatic contribution arrangement or the date of any adjustment to the participant contribution rate and annually thereafter. Among other requirements, the notice must explain the purpose of the PLESA (short-term emergency savings), the limits on and tax treatment of the PLESA and any fees or expenses.
The notice must also explain the procedures for making a contribution (or for opting out in the case of automatic enrollment) and the process for making a withdrawal. Participants must also receive information on their current account balances and matching contributions. The PLESA notice may be combined with other notices. The above notices can be provided with any other notice required under ERISA, if such other notice is provided to the participant at the time required for the PLESA notice.
The PLESA need not be included in the individual benefit statement or in fiduciary disclosures.
The DOL will address separately how the PLESA is to be treated for purposes of the Form 5500.
Despite the guidance from the IRS and the DOL, a lot of questions remain about the administration and cost of implementing a PLESA. Also unknown is sponsor and participant interest in PLESAs. Answers to these questions will have to wait until recordkeepers and others have determined the cost of administering a PLESA and provided the necessary procedures.
Certain provisions that allow PLESAs are included in ERISA but not the Internal Revenue Code. Although ERISA does not apply to public sector plans, the Internal Revenue Code PLESA provisions mention governmental 457(b) plans. Public sector groups have asked the Treasury and the DOL for clarification on whether public sector plans can establish PLESAs.
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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.