IRS Takes On SECURE 2.0 Emergency Savings Accounts

The IRS issued initial guidance on pension-linked emergency savings accounts as provided for in the SECURE 2.0 Act of 2022 and active as of 2024.

The guidance is not comprehensive and focuses on the anti-abuse and manipulation methods a sponsor can adopt to prevent participants from contributing to a PLESA solely for the purpose of gaining an employee match into their retirement account before withdrawing their own contributions.

Inspired in part by the COVID-19 pandemic and people’s need for emergency savings, SECURE 2.0 provided for PLESAs, sometimes called sidecar accounts, that are tied to a defined contribution plan but have more flexible withdrawal rules. If a sponsor elects to create such an account, it must permit its participants to withdraw from the account at least once per month, and such withdrawal does not bring a 10% penalty.

A PLESA is a Roth account, and contributions to it must cease when its balance reaches $2,500, though appreciation on the assets therein may carry the balance over $2,500. The feature is not available to highly-compensated employees, those making more than $155,000 for 2024.

The IRS notice pointed out that if an employer offers a match, then participant contributions to the PLESA also trigger a match to the retirement account. This created some concerns that some participants would abuse this structure.

The notice explained that sponsors are not required to check against abuse of this kind but are permitted to do so. The IRS laid this out rather explicitly in the guidance, writing: “A plan sponsor may consider a participant as not manipulating the matching contribution rules if the participant made a $2,500 contribution in one year, received the matching contribution on such amount, and then took $2,500 in distributions that year and repeated that pattern in subsequent years.”

The IRS listed potential enforcement techniques that the IRS deems unreasonable and not allowed:

• Sponsors may not forfeit a matching contribution already made to a retirement account on the basis of a previous ESA participant contribution;
• Sponsors may not suspend the ability of a participant to contribute to the PLESA on their own; and
• Sponsors may not suspend matching contributions made in relation to participant contributions to their retirement account.

The IRS noted that current law permits plans to limit matches made in relation to PLESA contributions as a way to mitigate abuse. Beyond that, the IRS did not list reasonable measures that sponsors could take, instead soliciting public comment on the matter.

The IRS will accept those comments suggesting reasonable methods of limiting PLESA abuse until April 5.

When making suggestions, the IRS encourages commenters to keep the following in mind: “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.”