IRS and DOL Issue Initial Guidance on Pension-Linked Emergency Savings Accounts

Effective January 1, 2024, employers who sponsor 401(k), 403(b), or governmental 457(b) plans have a new plan design option to add emergency savings accounts to their existing retirement plans. Pursuant to Section 127 of SECURE 2.0 (“Section 127”), which amended both the Internal Revenue Code and ERISA, a pension-linked emergency savings account (“PLESA”) is a short-term savings account established and maintained as part of an individual account plan. This client alert summarizes the rules applicable to PLESAs, and then discusses the anti-abuse guidance issued by the IRS in Notice 2024-22 and the Department of Labor FAQs addressing general compliance questions (“DOL FAQs”), both released in January 2024.

PLESAs: An Overview

PLESAs are subject to a number of statutory requirements, including:

• They must be designated Roth accounts accepting only participant contributions.
• Participation may be voluntary, or subject to an automatic contribution arrangement.
• Eligibility is limited to employees who are not highly-compensated (NHCEs).
• No minimum contribution or account balance requirement may be imposed.
• The maximum PLESA balance is the lesser of $2,500 (as adjusted) or a plan-set limit.
• Whole or partial withdrawals must be permitted at least once per calendar month.
• The first four withdrawals per calendar year must not be subject to any fees or charges.
• Withdrawals are not subject to the 10% additional tax on early withdrawals.
• Withdrawals may not be rolled over unless the employee’s employment or the PLESA itself is terminated.
• Separate accounting and recordkeeping must be maintained for each PLESA.
• Notwithstanding the anti-cutback rules, a plan may cease to offer PLESAs at any time.
• Disclosure and notice requirements apply.
• A plan offering matching contributions must match PLESA contributions; such matching contributions are made to the participant’s plan account which is not the PLESA.
• Pursuant to an anti-abuse rule, a plan may employ reasonable procedures to limit the frequency or amount of any matching contributions with respect to PLESA contributions.

IRS Notice 2024-22

With regard to the anti-abuse rule, Section 127 required Treasury, in consultation with the Secretary of Labor, to issue regulations or other guidance not later than twelve months after the enactment of SECURE 2.0, i.e., by December 29, 2023. Notice 2024-22 is intended to satisfy that requirement.

Notice 2024-22 notes that Section 127 includes explicit rules that limit manipulation of a PLESA to cause matching contributions to exceed the intended amounts or frequency. These include the rule that any matching contributions made under the plan are treated first as attributable to a participant’s elective deferrals other than PLESA contributions and the rule that matching contributions on account of contributions to the PLESA cannot exceed the maximum PLESA account balance for the plan year of $2,500 (adjusted) or the lower plan-set limit.

Notice 2024-22 remarks that a plan sponsor might determine that under these rules, it is not unreasonable for a participant to make a $2,500 contribution in one year, receive the applicable matching contribution on that $2,500, take a $2,500 distribution from the PLESA that year, and then repeat that pattern in subsequent years. Implicitly, Notice 2024-22 agrees with this plan sponsor determination.

Notwithstanding, Section 127 also permits a plan with a PLESA to employ reasonable procedures to limit the frequency or amount of matching contributions, solely to the extent necessary to prevent manipulation of the plan’s matching contribution rules. Notice 2024‑22 states that 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. While Notice 2024-22 does not provide examples of what might constitute a reasonable procedure, it does identify three unreasonable procedures. As stated in Notice 2024-22, these procedures are unreasonable:

• Forfeiture of matching contributions. A plan may not provide that matching contributions already made on account of participant contributions to the PLESA will be forfeited by reason of a participant’s withdrawal from the PLESA.
• Suspension of participant contributions. A plan may not suspend a participant’s ability to contribute to the participant’s PLESA on account of a withdrawal from the PLESA.
• Suspension of matching contributions on participant contributions to the underlying defined contribution plan. A plan may not suspend matching contributions made on behalf of participant elective deferrals to the underlying defined contribution plan.

Notice 2024-22 is clear that this list of unreasonable procedures is not exhaustive. At a minimum, however, it describes three procedures that should not be implemented with respect to PLESAs.

DOL FAQs

Section 127 did not impose a guidance deadline on the DOL analogous to the one for Treasury.  Nonetheless, the DOL prepared its FAQs in consultation with Treasury and the IRS, and the release of Notice 2024-22 and the DOL FAQs was presumably coordinated between the various parties.

The DOL FAQs present and respond to 20 questions regarding eligibility and participation, contributions, distributions and withdrawals, and administration and investment.  Here, we note two of immediate relevance to a plan sponsor adding a PLESA to an existing ERISA retirement plan:

• Participant contributions to a PLESA (not any employer matching contributions) are subject to the same timing rules for other individual account plan participant contributions, i.e., as of the earliest date that such contributions can reasonably be segregated from the employer’s general assets but in no case later than the 15^th business day of the month immediately following the month in which the contribution is either withheld or received by the employer.
• The ERISA provisions of Section 127 require that the plan sponsor (not the participant) select an investment vehicle for PLESA contributions consisting of cash, an interest-bearing deposit account, or an investment product designed to maintain dollar value, preserve liquidity, and provide a reasonable rate of return. Thus, PLESA contributions may generally not be invested in a plan’s qualified default investment alternative (“QDIA”) other than certain limited duration QDIAs, or in investment products that contain liquidity constraints, such as surrender charges at the participant or plan level.

Does this guidance have any relevance to non-ERISA plans?  The contribution timing requirement reflects the generally applicable DOL rules for participant contributions to ERISA plans.  Nothing in Section 127 imposes it on non-ERISA plans.  The application of the investment vehicle requirements is less clear.  Those requirements are set forth in the provisions of Section 127 which amend ERISA, but not in the provisions amending the Internal Revenue Code.  At the same time, the disclosure rules for PLESAs which Section 127 added to the Internal Revenue Code include disclosure of the investment vehicle selected pursuant to the ERISA provisions added by Section 127.   Guidance is needed on the application to non-ERISA plans of the ERISA provisions of Section 127 cross-referenced in, but not directly added to, the Internal Revenue Code.

Conclusion

IRS Notice 2024-22 responds to the requirement under Section 127 that guidance on the anti-abuse provisions applicable to PLESAs be issued by the first anniversary of the enactment of SECURE 2.0. Pursuant to that requirement, its application is limited to plans that offer matching contributions and that are considering implementing anti-abuse procedures beyond those explicitly provided for under Section 127.  The DOL FAQs provide guidance on other issues related to PLESAs in ERISA plans, such as contribution timing and permissible investments.  The formal application of some of them to non-ERISA plans remains unclear.

Additional issues await further guidance, including offering PLESAs in plans that do not otherwise provide for designated Roth contributions, offering PLESAs in safe harbor plans, the interaction of automatic contribution PLESAs with other such arrangements already in place under a plan, and the administration of PLESAs in non-ERISA plans generally.

Sponsors of both ERISA and non-ERISA plans may therefore wish to consult with benefits counsel before proceeding to add PLESAs to their existing retirement plans. For assistance with PLESAs, as well as retirement plan design and compliance more generally, please contact Ronald G. Cluett or Richard W. Skillman.