PENSION-LINKED EMERGENCY SAVINGS ACCOUNTS (PLESA):
Authorized under the SECURE 2.0 Act of 2022, PLESAs are individual accounts in defined contribution plans and are designed to permit and encourage employees to save for financial emergencies. A PLESA would allow non–highly compensated employees in Sec. 401(k), 403(b), or governmental 457(b) plans to make after-tax Roth contributions to a separate PLESA account and to draw on that account as frequently as monthly to pay unpredictable, short-term emergency expenses, such as an auto repair.
PLESAs are intended to allow low and middle-income employees to accumulate by payroll deduction easy-to-access funds that they can use in an emergency. Only non–highly compensated employees as defined in Sec. 414(q) may contribute to a PLESA (Sec. 402A(e)(2)). Highly compensated employees include employees with eligible compensation for the lookback year of more than $150,000 in 2023 (indexed for inflation). Such contributions must take the form of designated after-tax Roth contributions under Sec. 402A(e)(1)(A).
This is not a retirement plan; it is an emergency savings account. Employee contributions are not tax deductible. Contributions cannot be made once the PLESA balance exceeds the lesser of $2,500, or any other amount specified by the plan sponsor. An attempt to put in more will have to be returned to the employee or credited to a different plan (e.g., the 401(k) itself). If non-highly-compensated employee becomes highly compensated, funds can remain in the PLESA and are subject to withdrawal, but no additional contributions are permitted.
The funds must be deposited in an interest-bearing savings account or a certificate of deposit with a financial institution. No other investment options are permitted.
Employees can withdraw their contributions without restriction. This means it can be regular amounts monthly, or as needed, up to the account balance. The 10% early distribution penalty does not apply to withdrawals from a PLESA.
Employers can offer PLESAs in plan years beginning after December 31, 2023. This means that, in some cases, eligible employees could have begun contributing to a PLESA as early as January 1, 2024. Subject to certain restrictions, matching contributions are made with respect to PLESA contributions at the same rate as contributions to the linked defined contribution plan.
Employees who are eligible to participate in an employer’s defined contribution plan and qualify to contribute to a PLESA, if their employer offers one, may contribute to the PLESA even if they do not participate in the employer’s defined contribution plan. In general, the maximum balance in a participant’s PLESA (attributable to contributions) is $2,500, though employers can choose to set a lower limit.
PLESAs are treated as designated Roth accounts. This means that contributions are not tax deductible, but withdrawals are generally tax free. Participants can withdraw funds held in the PLESA at least once a month, as necessary.
Guidance on reasonable measures employers who offer PLESAs can take to discourage potential manipulation of the PLESA matching contribution rules can be found in Notice 2024-22.
