IRS sets 'withdraw limits' on new 401(k)-linked emergency savings accounts

Employers may—but are not required to—implement programs to prevent abuses in their new pension-linked emergency savings account programs (PLESAs), the Internal Revenue Service, said, in initial guidance released last week.

The IRS said that PLESAs, which became effective under a provision in SECURE 2.0 this month, are treated as designated Roth accounts. Contributions are not tax deductible, but withdrawals generally are considered tax free. Participants may withdraw funds held in PLESAs at least once a month, as needed.

The document, issued Jan. 12, is not considered to be guidance covering the entire PLESAs program. Instead, it was designed to simply solicit comments on ways that employers may implement anti-abuse programs. Those comments, which can be submitted electronically at regulations.gov (type “IRS Notice 2024-22” in the search field), are due by April 5, 2024.

“The Treasury Department and IRS are interested in examples of reasonable procedures which effectively balance the policy of incentivizing emergency savings while discouraging potentially abusive practices,” the IRS said.

Employers were permitted to offer PLESAs in plan years that began on Dec. 31, 2023. That means that eligible employees could have begun contributing to their accounts as early as Jan. 1, 2024.

In the guidance, the IRS presented a general definition of an anti-abuse program.

“A reasonable anti-abuse procedure is one that balances the interests of participants in using the PLESA for its intended purpose with the interests of plan sponsors in preventing manipulation of the plan’s matching contribution rules,” the IRS said.

The IRS said that a plan sponsor may consider a participant as not manipulating the matching contribution if the person made a $2,500 contribution in one year, received the matching contribution on such amounts, then took $2,500 in distributions that year and continued that practice in subsequent years.

In a similar vein, since plans are not required to permit participants to take more than one distribution each month, plan sponsors may consider that limit as a permitted deterrence on possible manipulation of rules governing the program.

The IRS also provided some examples of possible anti-abuse provisions that a plan is not allowed to implement.

The IRS said that:

• A plan may not have rules that state matching contributions already made on account of a person’s contributions to their PLESA may be forfeited simply because the person made a withdrawal from their account.
• A plan may not suspend a participant’s ability to contribute to their account simply because they made a withdrawal.
• A plan may not suspend matching contributions made on account of a participant elective deferrals to their underlying contribution plan.

Some analysts are predicting that the emergency savings account will prove to be a particularly valuable benefit.

Related: Save for retirement or build up emergency funds? Helping employees do both

“With these key new provisions in SECURE 2.0 set to take effect, and with growing evidence of emergency savings as an effective workplace benefit, we predict that many more employers will offer emergency savings to their employees, empowering workers to address their short-term needs and build financial security,” analysts at the Aspen Institute’s Financial Security Program predicted.

Attorneys at Morgan Lewis said, however, that employers may want to proceed with caution.

“However, as described above, there are numerous design rules and requirements that a PLESA must satisfy and many administrative and operational complexities to consider,” they said in May. “What’s more, given the relatively modest maximum PLESA contribution limit (initially $2,500 and then indexed), plan sponsors may be reluctant to take on this complexity.”