Are Emergency Savings Account Deferrals Subject to Nondiscrimination Testing?

Q: We are a private, tax-exempt hospital that sponsors both a 403(b) and a 401(k) plan. Are the new deferrals to emergency savings accounts under the SECURE 2.0 Act subject to ADP or ACP testing?

Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: The applicable section of the SECURE 2.0 Act of 2022—Section 127—states that the emergency savings accounts are generally treated as designated Roth accounts, but it does not address application of the Section 402(g) limit to these contributions or ADP testing specifically.

Roth contributions, of course, are subject to ADP testing, so it is entirely possible that emergency savings contributions could be subject to ADP testing as well, but we will need IRS clarification on that in the future to confirm. In the event they are subject to ADP testing, counting them as ADP deferrals could certainly help ADP testing results for some plans, since only non-highly-compensated employees can make emergency savings contributions.

This is a moot point for your 403(b) plan, though, since that plan would not have an ADP test. However, any matching contributions made on these contributions are made to the participant’s regular plan account, meaning they could very well be subject to ACP testing. As with a number of provisions under SECURE 2.0, pending IRS guidance will dictate the practical implications of these new plan options.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Amy.Resnick@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future column.