Are you one of 63% of workers who cannot cover a $500 emergency expense? Effective January 1, 2024, help may come from your employer in the form of a PLESA which was created by the SECURE 2.0 Act of 2022.
What is a PLESA?
PLESA stands for pension-linked emergency savings account. Your retirement plan sponsor must choose to add this feature to your benefits. It is not required. If adopted, a PLESA would allow non-highly compensated employees in 401(k), 403(b), and 457(b) retirement plans to make contributions to a separate PLESA account. PLESAs are meant to allow employees to accumulate easy to access funds that can be used in an emergency.[i] These accounts are not meant for retirement savings.
Contributions
Contributions to PLESAs are made by payroll deduction and must take the form of after-tax contributions. Annual contributions to PLESAs may not exceed $2,500 or the amount designated by your plan sponsor. If a contribution exceeds that amount, you, the employee, may elect to contribute those funds to a different plan account instead. Otherwise, the excess is distributed to you.[ii]
If your plan sponsor chooses to offer PLESAs, you may have the option to enroll, or you may be automatically enrolled. Check with your benefits coordinator. Highly compensated employees, those with eligible compensation greater than $150,000 (2023 and indexed for inflation), are not allowed to open a PLESA.
Distributions
You can draw on your PLESA account as frequently as monthly to pay unpredictable, short-term emergency expenses such an unforeseen car or house repairs. There is no annual limit on withdrawals, nor a minimum balance required for the account. If your employer makes matching retirement plan contributions, they are required to match your PLESA contributions at the same rate. Those matching contributions are not added to the PLESA account, however. They go into a retirement plan account.
Funds in PLESAs must be held at a financial institution in cash, in an interest-bearing savings account, or in a certificate of deposit. The goal is to keep the funds liquid and safe. If you leave the company’s employment or the company terminates the plan, you must be allowed to transfer funds into a designated Roth account in the retirement plan. If none is available, then the funds are eligible for distribution to you. You may not transfer other employer plan funds into a PLESA.
How Widespread Will PLESAs Be?
There are good reasons an employer and plan sponsor may choose not to add a PLESA to their offering. For example, PLESAs will require extra bookkeeping to set up accounts and for recording contributions and withdrawals, as well as to invest funds at financial institutions in cash and cash-like instruments. Nevertheless, if you feel a PLESA would help you save for an emergency, talk with your benefits coordinator about adding it to your company’s offering.
IMPORTANT REMINDER: PLESAs do not take the place of saving for retirement. PLESA funds are meant for emergencies only.
Beverly Bowers, CFP®
This blog is part of a series that describes some of the new features or changes to your retirement plans created by the SECURE 2.0 Act of 2022. You might want to check out my previous blogs about other SECURE 2.0 Act changes: Retirement Plan Catchups; Military Spouse Tax Credits; Inherited IRAs; and RMD Rules Have Changed.
[i] https://editions.thetaxadviser.com/publication
[ii]https://editions.thetaxadviser.com/publication
