Compliance News | January 18, 2024

IRS Guidance on Pension-Linked Emergency Savings Accounts

For plan years beginning after December 31, 2023, the SECURE 2.0 Act authorized pension-linked emergency savings accounts (PLESAs) as one of two approaches to emergency savings. This PLESA provision allows a sponsor of a 401(k), 403(b) or governmental 457(b) plan to create a special type of short-term savings account that is treated as a type of Roth account.

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A PLESA must provide for matching contributions if the plan otherwise provides for matching contributions. Because this requirement could lead to abuse of the tax rules by participants who make an emergency contribution, receive a match and then immediately claim an emergency to takes a distribution of the employee contribution, SECURE 2.0 required the IRS to issue anti-abuse rules.

The IRS has issued guidance on the anti-abuse rules for PLESAs. Comments on the guidance will be accepted until April 5, 2024.

The guidance summarized here is not intended to be comprehensive with respect to PLESAs. The IRS will address other PLESA issues in future rulemaking.

The IRS guidance covers anti-abuse rules

The guidance, Notice 2024-22, addresses the anti-abuse rules as well as several other issues. It highlights that the statutory provisions governing PLESAs may be sufficient constraints against abuse. Under the statute, any matching contributions must first match elective contributions before they can match emergency contributions. The amount of matching contributions cannot exceed $2,500 (indexed).

Also, plans are not required to permit participants to take more than one distribution per month. IRS notes that a plan sponsor may decide not to impose any restrictions beyond the statutory restrictions, viewing these as sufficient anti-abuse provisions.

While plans may adopt other reasonable limits, they must be solely for the purpose of limiting manipulation. The guidance provides that the IRS it would not consider any of the following restrictions as a result of a withdrawal of elective contributions to be reasonable limitations:

  • Forfeiture of some of the matching contributions attributable to PLESA contributions
  • Suspension of future participant contributions to a PLESA
  • Suspension of matching contributions on participant contributions to the underlying defined contribution plan

Background on how a PLESA works

An applicable retirement plan may either offer to enroll an eligible participant in a PLESA or automatically enroll an eligible participant in a PLESA pursuant to the automatic contribution rules. The plan must separately account for contributions to the PLESA (and any earnings attributable to the contribution), maintain separate recordkeeping and allow withdrawals in accordance with specific distribution rules.

Highly compensated employees are not eligible to make PLESA contributions, but a participant who becomes a highly compensated employee after setting up a PLESA may keep and withdraw from the current PLESA account.

As noted above, the PLESA is a Roth account, meaning the elective contributions are after-tax contributions and any distributions from the PLESA are not taxed. The withdrawals are also not subject to the early distribution tax. Matching contributions are not part of the PLESA and are subject to the normal distribution and tax rules.

A PLESA may not accept any contribution that would cause the portion of the account balance attributable to participant contributions to exceed the lesser of $2,500 (indexed) or an amount determined by the plan sponsor of the PLESA.

If the sponsor makes matching contributions to a plan of which the PLESA is part, the sponsor must make matching contributions to the PLESA at the same rate. The matching contributions are made to the part of the plan that is not the PLESA. Generally, the PLESA must allow the participant to make a withdrawal in whole or part at least once per calendar month. A sponsor may adopt reasonable procedures to limit the frequency or amount of matching contributions, but solely to the extent necessary to prevent manipulation. A sponsor that creates a PLESA as part of a plan may eliminate the PLESA at any time without being subject to the anti-cutback rules.

Request for comments

The IRS welcomes comments on the anti-abuse issues addressed in this guidance. It highlights two revenue rulings (74-55 and 74-56), which it does not view as applicable in the context of PLESAs. These revenue rulings address general restrictions on distributions from profit-sharing accounts. The IRS requests comments on the applicability of these revenue rulings, and on the regulations on which the revenue rulings are based.

The IRS also welcomes comments on any other issue affecting PLESAs that needs guidance by the April 5, 2024 comment deadline.

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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.