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How SECURE 2.0 Can Help Defined Contribution Plan Participants Access Emergency Funds

The SECURE 2.0 Act of 2022 creates new ways for retirement plan participants to access funds in an emergency. Read on for details.
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We’ve all been there—blindsided by a flat tire, sudden medical bill, or other financial burden. These situations arise when we least expect them and can present significant challenges. Emergencies can be disruptive to our budgets and financial plans.

Financial planners have long preached the importance of having adequate short-term savings. Most experts agree that having three to six months of living expenses set aside is a healthy goal. These reserve funds would act as a financial “cushion” in the event of an emergency. However, today’s ongoing financial demands can be overwhelming and make it challenging to establish this level of financial stability.

Fortunately, the SECURE 2.0 Act of 2022 made it a priority to create new avenues for individuals to access funds in a crunch. Congress included provisions that make saving and accessing monies for emergencies more accessible for retirement plan participants. In this article, we’ll provide an overview of these provisions that are slated to become effective in 2024 and beyond.

Emergency Savings Account Feature – The pension-linked emergency savings account (PLESA) will be available as an optional plan feature that plan sponsors can choose to incorporate into their existing retirement plans. The key details include:

  • The PLESA sub-account is linked to a participant’s retirement account and has a balance capped at $2,500 (or less if outlined by the plan sponsor).
  • The monies in the account are required to be invested in an investment vehicle that is principal protected.
  • The account must only accept contributions on a Roth basis (contributions are taxed before deposit to the account).
  • Participants can withdraw monies from the account at least once each month and no fees or charges may apply for the first four withdrawals each plan year.
  • In the event a participant leaves an employer, they can take a distribution of the funds or roll it over to a Roth account.
  • Additional specifics:
    • Employer contributions cannot be made to this account.
    • Only non-highly compensated employees can take advantage of the feature.
    • Monies contributed to the account will count against the annual retirement deferral limit ($22,500 for 2023).

Withdrawals for Emergency Expenses – Historically, hardship distributions have been restrictive in terms of what constitutes a hardship (medical expenses, disaster relief, etc.). In addition, rules and guidance for plan sponsors to substantiate the hardship need have been complex and cumbersome. A new provision in the SECURE 2.0 Act provides a new method allowing participants to access funds for “unforeseeable or immediate financial needs relating to necessary or personal family emergency expenses” with the following parameters:

  • The distribution amount is limited to $1,000 or less and is penalty-free (no 10% early withdrawal penalty).
  • Only one distribution is permitted per year, and it may be repaid through regular payroll deductions within three years. If a withdrawal has not been repaid, then additional distributions are not permitted within the three-year window.
  • The provision allows participants to self-certify their eligibility instead of requiring plan sponsors to verify and authenticate the details of the withdrawal.

Retirement Savings Lost & Found – While this U.S. Department of Labor initiative is not specifically aimed at providing access to emergency funds, it’s an important program that could be invaluable to individuals attempting to track down old employer retirement plan benefits. The program will create an online database that participants (and beneficiaries) of retirement plans can use to locate retirement plan accounts.

A 2021 study by Capitalize1 estimated there are more than 24 million 401(k) plan accounts with an average balance of $55,400 that have been forgotten. This amounts to roughly $1.35 trillion of assets and about 20% of overall 401(k) plan assets. Hence, there is a significant amount of funding that former employees may be able to access in the event they are in financial distress.

Emergencies are a fact of life. Yet, a personal financial crisis can be averted with access to “rainy day” funds. With the new provisions outlined in the SECURE 2.0 Act and existing provisions, e.g., hardship withdrawals, plan loans, etc., individuals will have more options to access emergency monies and avoid costly debts.

Forvis Mazars Private Client™ can aid you in making well-informed decisions as you work toward achieving your goals throughout your lifetime and through the ever-changing legislative landscape. We invite you to reach out to one of our professionals or submit the Contact Us form below to have a conversation about how the SECURE 2.0 Act may affect your strategies moving forward.

Other Articles in This Series

SECURE 2.0 Act: The Role of Trusted Advisors in an Ever-Changing Retirement Landscape

  • 1“The True Cost of Forgotten 401(k) Accounts,” hicapitalize.com, June 2, 2021
 

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