The SECURE 2.0 Act, signed into law at the close of 2022, introduced a new way for retirement plan sponsors to offer emergency savings accounts inside individual account retirement plans.
The array of options for supporting employees with emergency savings was already complicated prior to the new law, and this adds another piece to that puzzle. So how can employers maximize this new workplace savings option and choose the best approach for their employees' needs?
The new workplace savings accounts under SECURE 2.0
The first step is to demystify exactly what Secure 2.0 entails as far as workplace savings accounts. This new legislation allows individual account retirement plans to have an emergency savings account within them, effective after December 31, 2023. The main features of these accounts are:
- Employers may automatically enroll employees into these accounts up to 3% of pay.
- Contributions are capped so the account balance does not exceed the lesser of $2,500 or an amount set by the plan sponsor. After this, contributions may be automatically redirected to a Roth retirement account in the plan, if the employee has one.
- Employee contributions are made like Roth contributions, after tax.
- The money must be invested in an interest-bearing deposit account or an investment product designed to preserve principal.
- The savings contributions by the employee count for the purposes of any employer match in the plan, up to the same dollar amount as the account balance limit ($2,500 or less as set by the plan sponsor). These matching dollars must be directed to the retirement account within the plan, not the savings account.
- Only non-highly compensated employees are eligible.
- Employees are allowed to withdraw up to the full account balance at least once per calendar month. The first four withdrawals in the plan year must be free.
For savings accounts to make an impact, financial wellness is needed
In order to maximize the impact of a workplace savings program, it's important for employers to consider a learning based on decades of research and trial and error across the financial health sector: emergency savings education alone is not enough.
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