Pension-Linked Emergency Accounts Can Incentivize Lower-Income Enrollment

Kendra Isaacson, a principal at public policy consultancy Mindset and a former tax counsel for the Senate Committee on Health, Education, Labor and Pensions, explained that pension-linked emergency savings accounts are an important “coverage expander,” while also highlighting some of the shortcomings of the SECURE 2.0 Act of 2022.

Her remarks were delivered Tuesday at the EBRI-Milken Institute 2024 Retirement Symposium, hosted at Washington, D.C.’s Kennedy Center by the Employee Benefit Research Institute and the Milken Institute.

Emergency Savings

SECURE 2.0 permits sponsors to create an emergency savings account connected to their retirement account, known as a PLESA. The balance of the PLESA can reach up to $2,500, and participants can draw from it without an early withdrawal penalty. Both the IRS and the Department of Labor have recently issued guidance on PLESAs, clarifying how plan fiduciaries can administer and manage the new benefit.

Isaacson, a longtime advocate for PLESAs and their inclusion in SECURE 2.0, explained that many lower-income savers are often more hesitant to keep their money “locked up” than other workers, and as a consequence, many do not save as much as they could.

The idea of a PLESA, sometimes called a sidecar account (Isaacson’s preferred name), is that it provides the liquidity that lower-income savers need to cover emergency expenses, therefore encouraging them to save in their tax-deferred retirement plan and potentially further benefit from an employer match.

SECURE 2.0 limits access to PLESAs to non-highly-compensated employees, those making less than $155,000 per year. This provision was added to help the bill’s passage and is something Isaacson hopes will be removed later. The limit, according to Isaacson, creates unnecessary compliance issues and uncertainty, especially for employees who start a PLESA while making less than $155,000 and get a raise later on that puts them over that limit.

She also said the limit of $2,500 could and probably should be increased; some proposals that were considered put the limit as high as $10,000, she noted.

Lifetime Income

Isaacson also advocated at the symposium for greater availability in defined contribution plans of lifetime income options such as annuities. She explained that there is demand for these products in plans, but there are certain practical issues with doing so.

She believes that “DC plans should have a distribution option that is a full or partial lifetime income option,” but because of higher fees and difficulties selecting a provider, “plans are skittish.” Annuities can also bring liquidity issues for employees who do not stay in a plan for long or only contribute a small amount of money.

Lifetime income “should not be a default, but it should be an option,” Isaacson said, and “could be right for some people” in DC plans. The Lifetime Income for Employees Act, introduced in the House of Representatives in June, would permit DC plans to offer prudent annuity products as a default investment. SECURE 2.0 already provides more flexibility and availability for offering annuities in DC plans.

Lastly, Isaacson noted that the DOL’s required report on Interpretative Bulletin 95-1, which was due on December 29, should be completed soon. IB 95-1 describes the criteria that fiduciaries should consider when selecting a provider for a pension risk transfer. A report on possible changes to these criteria was mandated by SECURE 2.0.