DOL and IRS Weigh In on PLESAs

Section 127 of the SECURE 2.0 Act of 2022 (“SECURE 2.0 Act”) permits plan sponsors to include a new pension-linked emergency savings account (PLESA) option in their existing defined contribution retirement plans. PLESAs are individual savings accounts designed to permit and encourage employees to save for financial emergencies. Employers can offer PLESAs in plan years beginning after December 31, 2023.  

On January 12, 2024, the IRS issued Notice 2024-22 (“IRS Notice”) regarding anti-abuse rules for PLESAs, and five days later the DOL issued FAQs regarding PLESA compliance with the Employee Retirement Income Security Act of 1974, as amended (ERISA). This article summarizes both the IRS and DOL guidance.

DOL FAQs

The DOL FAQs provide 20 questions and answers regarding (i) Eligibility and Participation, (ii) Contributions, (iii) Distributions and Withdrawals, and (iv) Administration and Investment. We have summarized the major points of interest below:

Eligibility and Contributions

• Eligibility. ERISA section 801(b)(1) provides that an individual is eligible to participate in a PLESA if he or she meets any plan requirements for minimum age, service, or otherwise, and if they are not a highly compensated employee.
• Automatic Employment. An employer may automatically enroll employees in its PLESA program. However, employees must receive written notification before actual enrollment and be informed they can opt out and withdraw their money free of charge.
• Minimum Amount for Opening or Minimum Balance Requirement. A plan cannot impose a minimum amount required to open a PLESA or a minimum balance to be maintained in a PLESA. According to the DOL, ERISA prohibits policies requiring (1) closure and distribution based on a minimum PLESA balance requirement; (2) imposition of penalties (such as fees or withdrawal right suspensions) for failure to meet specified PLESA balances; and (3) minimum required PLESA contributions per pay period.

Contributions

• Contribution Rules. All contributions to PLESAs must be Roth contributions. Employers may set maximum account balance limits of up to $2,500. If an employer chooses to implement a PLESA with an automatic enrollment feature, then the automatic contribution percentage must be at a rate of 3% or less of the compensation of the eligible participant. In addition, contributions to a PLESA are included in the Code Section 402(g) limit on elective deferrals ($23,000 for 2024). If a plan provides a matching contribution, a participant's contributions to his or her PLESA must be eligible for matching contributions at the same matching rate as that for non-PLESA elective deferrals. All matching contributions, including those attributable to PLESA contributions, are not to be allocated to the PLESA but to the retirement savings portion of the plan.
• Flexibility to Include Earnings. Employers have the flexibility to either include or exclude earnings in applying the $2,500 (or less) PLESA limit. A plan could prohibit future contributions once the entire account balance reaches the plan’s limit or, alternatively, the plan could cap contributions at the specified limit and any earnings that cause the account balance to exceed the limit would not be considered a violation of the limit.
• No Annual Limit. The imposition of an annual limit on contributions is impermissible because participants must be permitted to replenish funds following any withdrawals. (However, the DOL cautions that IRS anti-abuse rules may apply).
• Remit and Recordkeeping Requirements. The rules on the timing of when participant contributions must be transferred to the PLESA generally follow the same rules as employee deferrals and plan loans. An employer (or other plan sponsor) should remit amounts withheld from wages to the PLESA as of the earliest date that such contributions can reasonably be segregated from the employer's general assets but in no event later than the 15th business day of the month immediately following the month in which the contribution is either withheld or received by the employer. Plans must separately account for PLESA participant contributions (and any earnings attributable to such contributions) and maintain separate recordkeeping with respect to each PLESA.

Distributions and Withdrawals

• Fees for Withdrawals. The plan must allow participants to make withdrawals at their direction (no requirements for the participant to demonstrate or certify that an emergency exists) at least once per month. Plans have the discretion to allow PLESA withdrawals more frequently than once a month. Additionally, PLESAs may be subject to reasonable fees or charges after the first four withdrawals during the plan year, including reasonable reimbursement fees imposed for the incidental costs of handling paper checks for payment of a withdrawal.
• No Administrative Restrictions on Distributions. There are no explicit restrictions on the manner in which plan administrators distribute withdrawals to PLESA participants. The withdrawals may be distributed via check, debit card, or electronic transfer.

Administration and Investment

• Permissible Investments. PLESA contributions are required to be held as cash, in an interest-bearing deposit account, or in an investment product designed to (1) maintain the dollar value that is equal to the amount invested in the product over the term of such investment and (2) preserve the principal and provide a reasonable rate of return. Plan fiduciaries may select any investment product that satisfies these criteria, regardless of the type of financial institution that issues or underwrites it, the industry in which the institution operates, or the applicable principal regulators. It is important to note that the overall objective of the relief for PLESAs set forth in the SECURE 2.0 Act is capital preservation and liquidity, which provides immediate access to savings in order to respond to emergency financial needs. An investment product that contains liquidity constraints does not generally satisfy this objective. The DOL notes that a plan’s qualified default investment alternative or QDIA generally does not meet these requirements.
• Notices. Plan administrators must provide, not less than 30 days and not more than 90 days prior to the date of the first contribution to the PLESA (including any contribution under an automatic contribution arrangement) and annually thereafter, a notice describing:

• that the purpose of the PLESA is for short-term, emergency savings;
• the limits on, and tax treatment of, contributions to a participant’s PLESA;
• any fees, expenses, restrictions, or charges associated with the PLESA;
• procedures for electing to make contributions to or opting out of a PLESA, changing participant contribution rates, and making PLESA withdrawals, including any limits on frequency;
• as applicable, the amount of the intended contribution to the PLESA or the change in the percentage of the participant’s compensation with respect to such contribution;
• the amount in the PLESA and the amount or percentage of compensation that a participant has contributed to the PLESA;
• the designated investment option for amounts contributed to the PLESA;
• the options for the PLESA account balance after termination of employment or termination of the PLESA by the plan sponsor; and
• the ability of a participant who becomes a highly compensated employee to withdraw any PLESA account balance and the inability of such a participant to make further PLESA contributions.

The initial and annual notices may be included with any other notice under ERISA if such other notice is provided to the participant at the time required for such notice.

IRS Notice Regarding Anti-Abuse Rules

In addition to the general complexities involved with administering a PLESA, many employers may be concerned about the potential for employees to abuse the arrangements by repeatedly making contributions to the PLESA, getting the benefit of the employer matching contributions, and shortly thereafter withdrawing their employee contributions. To address this, the SECURE 2.0 Act does permit plans to use reasonable procedures, under Section 402(e)(12) of the Internal Revenue Code (the “Code”), to limit the frequency or amount of matching contributions to a PLESA.

The IRS Notice is not intended to provide comprehensive guidance with respect to Section 127 of the SECURE 2.0 Act, but rather only guidance regarding the anti-abuse rules. The IRS Notice describes some approaches specifically permitted under the statute, and then provides examples of anti-abuse measures that the Treasury Department and IRS would deem to be unreasonable and therefore cannot be used to limit the frequency or amount of matching contributions made to a PLESA. 

Provisions Under Code Section 402A

• Order of Matching Contributions. Matching contributions under the plan are first attributed to a participant’s elective deferrals other than PLESA contributions. Therefore, any elective deferrals made under the plan will be matched first and will lower the availability of matching contributions made on account of a participant’s contributions to their PLESA.
• Limitation on Annual Matching Contributions. Matching contributions made in connection to a PLESA cannot exceed $2,500 (as adjusted) or a lower plan-set limit for the plan year. 

The IRS Notice observes that a plan sponsor might determine that the above rules are sufficient anti-abuse provisions and choose not to impose other restrictions. For example, a plan sponsor may determine that a participant is not manipulating the matching contribution rules if, year after year, the participant makes a $2,500 contribution in one year, receives the matching contribution on that amount, and then takes $2,500 in distributions that same year. Additionally, plan sponsors may view the option of limiting the number of permissible withdrawals to a maximum of once a month as a sufficient constraint on the potential manipulation of the matching contribution rules.

Plan Procedures

The IRS Notice indicates that for a plan of which PLESAs are a part, plan sponsors may be concerned that participants could contribute to the PLESAs and take distributions in a way that maximizes the match received but maintains little to no employee contributions to the PLESAs. A plan sponsor may implement additional reasonable procedures to prevent abuse but only to the extent necessary to prevent manipulation of the rules and cause matching contributions to exceed the maximum permitted amount or frequency. The IRS Notice does not provide examples of what constitutes reasonable procedures, but it does identify three unreasonable procedures as follows:

• Forfeiture of Matching Contributions. A plan may not provide for the forfeiture of matching contributions already made if a participant makes a withdrawal from a PLESA.
• Suspension of Participant Contributions to PLESA. A plan may not suspend a participant’s ability to contribute to his or her PLESA if he or she makes 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 account of the participant’s elective deferrals to the defined contribution plan.    

The IRS observed that a reasonable anti-abuse measure is one that balances the interests of the plan sponsor in preventing manipulation of the matching contribution rules with the interests of participants in using a PLESA for its intended purpose.

Awaiting Further Guidance

We await further guidance regarding additional issues for both PLESAs under Section 127 of the SECURE 2.0 Act (e.g., the necessity to include a description of a plan’s PLESA feature in already-required notices or to address a PLESA feature in Form 5500) and SECURE 2.0 Act as a whole.