In the wake of the SECURE 2.0 law, a novel benefit option has emerged for employees grappling with unforeseen emergencies. Dubbed as Pension-Linked Emergency Savings Accounts (PLESAs), this provision, effective for plan years that begun January 1, 2024, offers a lifeline to employees in times of need. The IRS has recently issued guidelines regarding these accounts (outlined in Notice 2024-22), and the U.S. Department of Labor (DOL) has furnished a set of frequently asked questions to aid employers, plan sponsors, participants, and other stakeholders in grasping their essence.
Understanding PLESA Basics:
PLESAs, as delineated by the DOL, are short-term savings accounts established and managed within a defined contribution plan. Employers operating 401(k), 403(b), and 457(b) plans have the option to extend PLESAs to non-highly compensated employees. For the year 2024, a highly compensated employee is defined as an individual who earned $150,000 or more in 2023.
Key Features of PLESA:
- Contributions from participants cannot exceed $2,500 in 2024 (or a lower amount set by the plan sponsor), with adjustments for inflation in subsequent years.
- Employers may offer eligible participants the choice to enroll in PLESAs from 2024 onwards or can opt for automatic enrollment.
- PLESAs do not entail a minimum contribution or account balance requirement.
- Participants are entitled to withdraw funds at least once per calendar month, with distributions mandated to be executed “as soon as practicable.”
- Initial four withdrawals per plan year are exempt from fees or charges, while subsequent withdrawals may incur reasonable fees.
- Contributions must be held in cash, interest-bearing deposit accounts, or investment products.
- In the event of a participant transitioning to highly compensated status, further contributions are prohibited, although the individual retains the right to withdraw the balance.
- Contributions are made on a Roth basis, whereby they are included in taxable income, but withdrawals are tax-free.
Simplified Withdrawal Process:
One notable feature of PLESAs is the absence of a requirement for participants to substantiate the occurrence of an emergency before making withdrawals. The DOL affirms that withdrawals are at the discretion of the participant.
These clarify the basic elements of PLESAs. Should you seek clarification on these or other fringe benefits and their tax ramifications, do not hesitate to reach out to us at Accavallo & Company. You can reach us at (203) 925-9600 or email us at [email protected].
