IRS and DOL Issue Preliminary Guidance on Pension-Linked Savings Accounts

Author: Rena Pirsos, Brightmine Legal Editor

January 22, 2024

The Internal Revenue Service (IRS) and the US Department of Labor (DOL) have released preliminary guidance on pension-linked emergency savings accounts (PLESAs).

Under the SECURE 2.0 Act, effective with the 2024 plan year, PLESAs are linked to an employer's underlying deferred compensation plan, such as a 401(k) or 403(b) plan. Employers may offer PLESAs to non-highly compensated employees or, alternatively, non-highly compensated employees may be automatically enrolled into a PLESA. PLESAs operate on a Roth after-tax basis, with contributions limited to 3% of an employee's salary up to $2,500. Employers may set a lower contribution rate.

DOL Guidance

The DOL released a set of Frequently Asked Questions that review the basics of PLESAs. The FAQs stress that all of the protections of the Employee Retirement Income Security Act (ERISA) apply to PLESAs, including:

  • Employee notice requirements for those who are automatically enrolled into a PLESA;
  • Employees’ right to opt out of the PLESA;
  • Requirements about when the PLESA must remit employees’ contributions, and
  • Plan fiduciaries’ duties of prudence when selecting PLESA investment options.

In addition, the FAQs note the following:

  • The $2,500 limit for PLESAs may include or exclude earnings attributable to the investment option an employee chose. PLESAs choosing to include earnings could have balances exceeding $2,500 without running afoul of ERISA;
  • Unlike hardship withdrawals from 401(k) accounts, an employee does not have to demonstrate an emergency before they can withdraw money from their PLESA; and
  • PLESAs can charge employees reasonable fees, expenses or other charges associated with administration of the PLESA.

IRS Guidance

Employers are not required to make matching contributions on account of PLESA participants; but if matching contributions are made, they must be made into the underlying 401(k) plan.

In Notice 2024-22, the IRS covers one particular aspect of PLESAs — the 401(k) anti-abuse rules, which prevent PLESA participants from manipulating employer matching contributions to increase the amount or rate of matching contributions. Under the 401(k) rules, the following are considered sufficient anti-abuse provisions:

  • The ordering of matching contributions - Contributions are first matched to employees’ pre-tax contributions and then to their PLESA contributions (i.e., employer matching PLESA contributions will be lower); and
  • The limit on annual PLESA contributions - PLESA accounts are capped at $2,500 or less.

Taking those two rules into consideration, an employee who contributed $2,500, received a matching contribution, withdrew $2,500 and did the same thing the next year would not be violating the anti-abuse rules.

An employer that believes those two rules are not sufficient may take other reasonable steps to enforce the anti-abuse rules provided the measures balance employees’ interests in saving for emergencies with their interest in preventing plan matching contribution rules from being manipulated. The following measures, however, are considered unreasonable:

  • Forfeiting matching contributions already made;
  • Suspending employees’ PLESA contributions; and
  • Suspending employer matching contributions to the underlying 401(k) plan.