A New Alternative for Employee Savings: Pension-Linked Emergency Savings Accounts

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Under the SECURE 2.0 Act, effective for plan years beginning after December 31, 2023, sponsors of 401(k), 403(b), and 457(b) plans have the option of amending such plans to provide “Pension-Linked Emergency Savings Accounts” for non-highly compensated employees.


The account would be a designated Roth account and could accept participant contributions only on a Roth basis. Distributions would be expressly exempt from the generally applicable 10 percent penalty tax.

Employers have the ability to automatically enroll employees into the “linked” account at up to 3% of compensation, up to $2,500 (indexed for inflation), or a lower amount set by the employer. The plan must either reject contributions that would exceed the limit or, if the participant has a Roth retirement account in the plan, redirect the excess contributions to that account, either automatically or at the participant’s instruction (but these contributions could not be directed to a pretax account within the plan).

I. Eligibility

Eligibility to participate in a pension-linked emergency savings account will be limited to non-highly compensated employees who meet the plan’s age, service, and other eligibility requirements.

Code Sec. 402A(e)(2)(A) further defines an eligible participant as being a non-highly compensated employee who meets the plan’s age, service, and other eligibility requirements “without regard to whether the individual is otherwise a participant in the plan”.

Employees who become highly compensated after having enrolled in the emergency savings account may not continue to make contributions to the account. However, such employees will retain the right to make withdrawals from the account.

II. Account Requirements

The pension-linked emergency savings account: (1) cannot impose minimum contribution or account balance requirements; (2) must permit withdrawals by the participant of all or a portion of the account balance, at the participant’s discretion, at least once per calendar month; and (3) must ensure distribution of withdrawals to the participant as soon as practicable from the date on which the participant elects to make the withdrawal.

A. Investments

The pension-linked emergency savings account must be held as cash, in an interest-bearing deposit account, or in an investment or insurance product offered by a state or federally-regulated institution. The investment product must be designed to: maintain the dollar value equal to the amount invested in the product over the term of the investment; preserve the principal; and provide a reasonable rate of return.

B. Fees and Restrictions

The account may be subject to “reasonable restrictions” under DOL regulations, and withdrawals may be subject to reasonable fees and charges, including reasonable reimbursement fees imposed for the incidental costs of handling paper checks related to the account. In addition, participants may take up to four withdrawals during a plan year before any fees or charges may be imposed. Withdrawals are not subject to the Code Section 72(t) early withdrawal penalty tax.

C. Establishment of Account

The pension-linked emergency savings accounts must be set forth in the plan document. The plan must: (1) separately account for contributions to the emergency savings account, including earnings allocable to the contributions; (ii) maintain separate recordkeeping with respect to each pension-linked emergency savings account; and (iii) allow withdrawals from the account in accordance with the rules under newly enacted Code Sec. 402A(e)(7).

Plan sponsors have the right to terminate the pension-linked emergency savings account at any time without violating the anti-cutback rules under Code Section 411(d)(6).

D. Account Contribution Limits

Contributions to a participant’s account may not cause the account balance to exceed the lesser of (1) $2,500; or (2) an amount determined by the plan sponsor.

E. Cost-of-Living Adjustments

The specified contribution limit would be subject to cost-of-living adjustments beginning with contributions beginning after December 31, 2024. The Departments of Labor and Treasury would have the authority to issue joint guidance regarding the adjustment of the maximum benefit (in addition to other provisions related to the pension-linked emergency savings accounts).

F. Excess Contributions

If contributions to a participant’s account for a tax year exceed the specified limit, the plan may allow the participant to elect increased contributions to another Roth account under the plan. Absent an election, the plan may deem the participant to have elected to increase contributions to the other Roth account at the rate at which contributions were being made to the pension-linked emergency savings account. If the participant does not maintain another Roth account under the plan, the plan must state that excess contributions will be rejected.

III. Automatic Contribution Arrangement

Plan sponsors can allow employees to elect to contribute to the pension-linked emergency savings account or can automatically enroll participants in the account pursuant to an automatic contribution arrangement. Under the automatic contribution arrangement, the participant will be treated as having elected to have the plan sponsor make elective contributions to a pension-linked emergency savings account at a participant contribution rate of up to three percent of compensation.

However, the participant may, at any time (subject to the reasonable advance notice required by the plan) affirmatively elect to: (1) make contributions at a different rate or amount; or (2) opt out of such contributions. Additionally, an employer may amend the participant contribution rate at least once per year.

IV. Required Participant Notice

Plan administrators must provide notice to plan participants, setting forth specific information regarding the pension-linked emergency savings account. This notice must be provided not less than 30 days and not more than 90 days prior to the date of the first contribution to the account, including any contribution under an automatic contribution arrangement, or the date of any adjustment to the participant contribution rate.

The notice must disclose: the limits on, and tax treatment of, contributions to the account; any fees, expenses, restrictions, or charges associated with the account; procedures for electing to make contributions to or opting out of the account, for changing contribution rates, and for making withdrawals from the account (including any limits on the frequency of withdrawals); the amount of the intended contribution to the account or a change in the percentage of the compensation of the participant; the amount in the emergency savings account and the amount or percentage of compensation that a participant has contributed to the account; the designated investment option for amounts contributed to the account; the options for the account balance available to a participant after termination of employment or the plan sponsor’s termination of the account; and the ability of a participant who becomes highly compensated employee to withdraw any account balance from the emergency savings account and restrictions on the ability of the participant to make further contributions to the account.

V. Employer Matching Contributions

Employers that make matching contributions to the individual account plan of which the pension-linked emergency savings account is part, must similarly match contributions by a participant to the emergency savings account. The matching contribution must be made at the same rate as any other matching contribution of an elective contribution by the participant.

For additional information, contact Emily Langdon at elangdon@fraserstryker.com.

This article has been prepared for general information purposes and (1) does not create or constitute an attorney-client relationship, (2) is not intended as a solicitation, (3) is not intended to convey or constitute legal advice, and (4) is not a substitute for obtaining legal advice from a qualified attorney. Always seek professional counsel prior to taking action.

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