Emergency savings account: A valuable benefit, now made easier with SECURE 2.0
No question the new Pension-Linked Emergency Savings Account is a much-needed option for employees, however, employers and plan sponsors must be vigilant in protecting themselves as they navigate potential pitfalls.
PLESAs, optional short-term savings accounts, came about as a need for quick access to emergency funds and are listed under the Employee Retirement Income Security Act of 1974 (ERISA), with corresponding provisions in the Internal Revenue Code. The emergency funds’ importance was reinforced through the COVID-19 pandemic and the overall economic panorama and as such, SECURE 2.0 provides an update to the PLESAs. Under Section 127, SECURE 2.0 enables eligible participants to withdraw up to $2,500 from their accounts, effective for plans on or after January 1, 2024. Acknowledging the complexity and confusion surrounding the updated PLESAs, the Department of Labor (DOL) recently published its FAQs to assist plan sponsors. However, integrating PLESAs as a feature introduces a new level of compliance requirements and potential risks for plan sponsors.
Navigating the ins and outs of PLESAs
To start, plan sponsors must grasp the eligibility process. A participant qualifies for a PLESA if they are eligible for a qualified plan provided by their employer and are not classified as a highly compensated employee. The threshold for “highly compensated” status is defined as $155,000 for 2024. Consequently, PLESA eligibility is contingent upon individual employees’ earnings not exceeding this amount.
When considering contributions, it’s important to understand that employers cannot directly contribute to PLESAs. However, if an employer offers matching contributions to a participant’s plan containing a PLESA, they must match PLESA contributions accordingly. Additionally, participants can withdraw all or part of their account at their discretion without facing a 10% early withdrawal penalty. Moreover, while plan sponsors can impose reasonable restrictions on fund withdrawals, participants must have the option to make full or partial withdrawals at least monthly.
Diving into challenging scenarios, we first encounter the administrative burdens posed by the latest provision on PLESAs. Opting to integrate PLESAs into existing plans may involve substantial administrative adjustments and resources – both a time-intensive and costly endeavor. Plan sponsors need to ensure that recordkeeping and reporting measures are properly maintained and keeping up with PLESAs may involve a revamp of current operations.
Additionally, plan sponsors must approach PLESAs with a risk management lens. To do so, any effort and decisions made by plan sponsors should be comprehensive, addressing compliance and fiduciary duties, and operational considerations. Ensuring strict adherence to regulatory standards is essential to evade penalties and legal repercussions. Fulfilling fiduciary obligations involves prudent management and prioritizing participants’ interests to avoid litigation or regulatory scrutiny. Operationally, robust processes and controls are necessary to mitigate administration risks like errors. Bottom line, proactive risk management is imperative.
Some plan sponsors have expressed concerns about potential participant abuse, stating that participants could leverage PLESAs to manipulate their matching contributions, potentially exceeding the intended amounts or frequency set by the plan sponsor. This abuse could result in financial strain on the plan and undermine its effectiveness in meeting retirement savings goals. While the Internal Revenue Service (IRS) has listed out guidelines to prevent such measures, the agency has suggested that plan sponsors should conduct due diligence and adopt additional anti-abuse procedures.
All of these complex factors add layers of difficulty to the management of retirement plans. However, PLESAs offer participants the opportunity for financial flexibility and security – particularly crucial during times of unexpected financial strain.
Yet, it’s essential to recognize that managing a retirement plan carries personal liability for administrators. While this risk can be mitigated through contracts with third-party providers, it can never be entirely eliminated. Therefore, if plan sponsors opt to offer PLESAs, it’s in their best interest to carefully consider various options to protect themselves from alleged or actual fiduciary breaches.
Exploring avenues for protection
As the responsibilities toward employees’ financial well-being and ERISA compliance continue to unfold, plan sponsors face a critical juncture in mitigating fiduciary risks. Insufficient planning and preparation could expose sponsors to the threat of costly litigation from stakeholders such as affected employees and even the federal government. The financial repercussions of these breaches could be significant for organizations; this is a critical time for plan sponsors to reduce their fiduciary risks via liability insurance. Plan sponsors, as well as board members, should highly consider a well written fiduciary liability insurance coverage, which can take the form of a separate insurance policy or an endorsement to another policy form.
Related: DOL issues guidance on new 401(k)-linked emergency savings accounts
Risk management measures should not just stop there. For comprehensive protection, organizations should also contemplate adding cyber insurance to their coverage. With the ever-growing threat of cyberattacks, this additional layer of security is essential to safeguarding sensitive information and ensuring complete protection. As plan sponsors continue to amass extensive amounts of sensitive data, protecting against cyber threats becomes imperative. The DOL has underscored in its best practices guidelines that fiduciaries are obligated to effectively mitigate cybersecurity risks. The potential financial fallout from a data security breach, including business interruption, or cyber extortion demands is substantial. Therefore, plan sponsors and their organizations must give careful thought to securing robust cyber insurance coverage to mitigate these risks effectively and protect their organization’s interests.
Overall, as plan sponsors move forward in their efforts to enhance employee financial security, PLESAs are a valuable option. But at the end of the day, plan sponsors must also be vigilant in protecting themselves as they navigate potential pitfalls associated with such a feature.
Richard Clarke, Chief Insurance Officer at Colonial Surety, leads insurance strategy and operations for the expansion of Colonial Surety’s SMB-focused product suite, building out the online platform into a one-stop-shop for America’s SMBs.