When the SECURE 2.0 Act (Setting Every Community Up for Retirement Enhancement) passed, it included provisions for employers to help their employees have an emergency savings account (ESA). Starting in 2024, it would only include employees who were not considered highly compensated—those making less than $155,000.
Even though the savings account is linked to the employee’s retirement account, they can withdraw money without penalties. Employers found the account rules complex, so some companies have created emergency accounts for their employees outside their retirement plans.
Most Americans Have No Emergency Savings
The new provision in the SECURE 2.0 Act was made because only about 25 percent of Americans have an emergency fund. As few as 39 percent have saved only one month’s worth of expenses.
Many lower-income employees and non-regular employees have a hard time saving for anything. When emergencies come, it is difficult for them to save anything for retirement. The Aspen Institute conducted trials revealing that when offering an automatic enrollment program employees gladly participated.
Get Emergency Money From Their Retirement Plan
The total amount that can be withdrawn, Inc says, from an ESA is $2,500. Employers can set a lower ceiling if they choose to.
In addition to withdrawing funds from their emergency account, they can also get some money from their retirement account. Inc says they can withdraw up to $1,000 annually from their retirement savings plan.
When the account reaches the $2,500 limit, all other money automatically goes into the retirement account. ADP mentions that after reaching the $2,500 limit, excess money will go into the retirement account, or the employee can stop the contributions until the account drops below the limit.
An Employer’s Matching Funds
Employers can help employees put money into the emergency fund by putting a percentage of their paycheck into the new account. They can also put it into their pension-linked emergency savings accounts (PLEAs). Although employers can provide matching funds, they must put all of it into the employee’s retirement account.
When employers have the emergency fund account tied into their employee’s retirement plans, they can automatically enroll them. When automatically enrolled, an employer can put up to 3 percent of their paycheck into the account. Companies offering separate emergency fund accounts must give their employees the option to enroll.
Penalties May Apply When Withdrawing Money From a 401(k)
If an employee has a 401(k) retirement account, they already can make a hardship withdrawal. The problem is that if they are under 59½, The New York Times says they will owe a 10 percent penalty fee on their withdrawal. It will also be necessary to pay income tax on that money.
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The benefit of having an emergency fund that is easily accessible is quickly evident when you consider the alternative. When people do not have such an account, they have several choices to get emergency cash—none of which are very good. They can put it on a credit card with high-interest rates, take out a loan from a bank, or make a withdrawal from their retirement account. A worse option would be a payday loan, with very high interest rates.
ADP says that employees can get money from their emergency savings account once a month. Although a distribution fee may be required, the first four distributions are free. No proof of an emergency will be required.
Contributions Can Be Automated
If your employer offers an ESA, it is easy to start making deposits into the account. You can have a set amount of your paycheck automatically deposited into the account every paycheck. This method enables you to consistently build an emergency fund up to the limit of $2,500—or whatever your employer decides is the limit. Even if you start with small deposits, it will build the account over time.
Access to your money is through a debit card that you can use as needed. Your account will build interest. Some institutions holding your money (if separate from your retirement account) may even offer automatic bill pay.
The Recommended Savings Goal
The time needed for employees to save up to $2,500 could take a couple of years if they only contribute 3 percent of their income toward creating an emergency fund. The 3 percent should be a starting point for employees. Chase recommends that everyone have three to six months of income in an emergency fund. The money should be enough to cover your monthly expenses during that time.
Even if you save money through your employer, you may want more than $2,500 to meet your needs. You can put more emergency money into various accounts at a bank, but make sure that the money is easily accessible. Avoid accounts such as certificates of deposits (CDs), where you must pay a penalty if you withdraw money early. Also, make sure that the bank is insured by the Federal Deposit Insurance Corporation (FDIC) to protect your money (up to $250,000 per depositor).
Decide in advance how much money you want in your emergency fund. Once you reach that goal, stop contributing money to it and put other money into accounts that earn higher interest rates.
Having an emergency fund for when you need emergency cash makes a lot of sense. Talk to your employer about enrolling in their emergency savings account plan—if they have one or start automatic deductions to your own savings account to build one. Even if it grows slowly, having money to fall back on when you need it will bring relief of mind and can also enable you to build a retirement fund.
The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
