Should employers match an emergency-savings account for employees?

SALT LAKE CITY — Amid inflation, Americans are trying to save for retirement while also staying frugal in case of emergencies. Could a work-based emergency-savings account be what is needed for workers feeling economic pressure now?

“Employees report that building savings for an emergency and paying monthly bills are just as stressful as — if not more stressful than — saving enough for retirement,” according to the 2023 Workplace Wellness Survey by the Employee Benefit Research Institute.

Congress passed the SECURE 2.0 Act in December 2022. The legislation is designed to help employees build their retirement savings, with a money match from their employers.

What is the Secure Act 2.0? 

After it was signed into law by President Joe Biden,  Secure Act 2.0 added dozens of new provisions. Time reported the act was designed to make it easier for Americans to save for retirement. They will be able to do so in individual retirement accounts (IRAs) and workplace plans. 

Time reported that employees who are “not highly compensated” will be able to connect their retirement plan to an emergency savings account. 

According to Time, a highly compensated employee is someone with at least 5% ownership of a company. Additionally, someone who earns over $150,000 per year is considered a highly compensated employee. 

More than half of all Americans now live paycheck to paycheck. Additionally, 57% of adults cannot afford a $1,000 emergency expense, a Bankrate survey from earlier this year found, as reported by CNBC.

Starting in 2024, as much as 3% of an employee’s paycheck can be automatically placed in an emergency savings account. Employees can deposit up to $2,500 total. Employees can withdraw the money up to four times a year with no fees, CNBC reported.

An expert weighs in

DMBA Certified Financial Planner Shane Stewart said that some companies are anxious about offering the option to their employees. They worry about violating other rules and laws. 

 

“The concept is a no-brainer. . . It’s a brilliant idea. Just got to get the legislation in place where more companies are more comfortable in offering it and not going afoul of any other laws,” said Stewart. 

Stewart said the emergency savings account is still a step in the right direction for those who lack impulse control.  The account does not leave spenders relying on a high-interest credit card.

Time reported that annual contributions are limited to $2,500, however, they can be capped at less by employers. Someone’s first four withdrawals each year will not be taxed. Furthermore, the first four withdrawals each year will not face penalties. 

“Even just the behavior of putting something in a savings account is still a great idea even if you have had problems with impulse control,” said Stewart

Where should the money go? 

Stewart said there is a discussion in the financial industry about where to place the emergency savings account. Options are inside and outside an individual’s 401(k) pension account. He added that there need to be restrictions on how many withdrawals are permitted during the year.

“I’m actually on the separate distinct side because then you don’t have some of the problems that you have in getting money in and out of a 401k. . . but either way, no matter where you put it, in the 401(k) or on its own, it’s a great concept and it needs to be clarified and offered more,” said Stewart.

Related:

• It’s never too late to start saving for retirement, expert says
• Delta’s emergency savings initiative offers workers up to $1,000 each. Here’s how it works

 

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