Contact Sales
Offering a workplace emergency savings account (ESA) can help employees save money today that will help them meet tomorrow’s unexpected financial needs. Research shows that these benefits are hugely popular with employees — 90% of survey respondents said they’d be interested in an employer-matched ESA benefit, for example — but building a workplace ESA is not as simple as helping employees open a savings account and linking it to their payroll.
Just like many other employee benefits and financial services, workplace ESAs are subject to a number of laws and regulations. These guidelines are intended to protect employees, set standards for employers, and provide instructions around the correct way to implement and manage this increasingly critical employee benefit.
To ensure compliance and mitigate legal risks, it’s important to understand the regulatory considerations for workplace ESAs and the options available for different organizations. Then, employers can craft a program that both makes sense from a business perspective and that resonates with employees. If this is a benefit you’re considering adding, or if you already have a workplace ESA and want to confirm that it’s compliant, here’s what you need to know.
One of the biggest pieces of legislation to touch on workplace ESAs is the SECURE 2.0 Act of 2022, which went into full effect on January 1, 2024. This act provided guidelines for employers to link workplace ESAs to retirement savings plans, also known as pension-linked emergency savings accounts (PLESAs). The IRS, Department of Labor, and Department of Treasury have outlined general compliance requirements for employers that want to offer PLESAs.
These workplace savings accounts are integrated into defined contribution plans, such as a 401(k) or other retirement savings account. There are also workplace ESAs that are not linked to or integrated with retirement savings accounts, and these accounts are not subject to the same guidelines as PLESAs. The two types of workplace ESA are also known as in-plan ESAs (in other words, a PLESA) and out-of-plan ESAs (which are not linked to retirement accounts and therefore are not subject to the SECURE 2.0 guidelines).
Both in-plan and out-of-plan ESAs have benefits and drawbacks for employers and employees alike. Organizations will need to recognize the differences in order to choose the best plan to add to their specific benefits package — and it’s also critical to be aware of the compliance and regulatory requirements of each in order to avoid legal liability, financial penalties, and other potential adverse consequences.
One big difference between in-plan and out-of-plan ESAs has to do with employer matching. While both types of plans technically allow employers to contribute to the workplace ESA by offering matching contributions, with a PLESA, those contributions must be made to the linked retirement plan instead of to the workplace ESA.
An out-of-plan ESA allows employers to match contributions directly to the emergency fund. Our research found that among survey respondents who were actively looking to take a new job, 48% said they’d prefer an employer-matched ESA over a matched 401(k), so it’s important that employers understand the distinction and can explain their contribution matching clearly to both current and prospective employees.
First, some history: The Employee Retirement Income Security Act of 1974 (ERISA) established the standards for pension plans, or retirement savings plans, including a requirement that “persons or entities who exercise discretionary control or authority over plan management or plan assets” practice fiduciary responsibilities.
In a nutshell, these fiduciary responsibilities include diversifying plan investments to minimize risk of large losses, ensuring that plans are consistent with ERISA, avoiding conflicts of interest, and acting prudently.
In-plan ESAs are also subject to ERISA, which provides certain guidelines for ESAs alongside SECURE 2.0, such as:
Out-of-plan ESAs do not have to adhere to all of these requirements; for example, an employer could offer an out-of-plan ESA to all employees, regardless of their level of compensation.
There are different tax implications for different types of workplace ESAs. That said, employee contributions to workplace ESAs, whether the ESA is in-plan or out-of-plan, are made post-tax, meaning that federal and state income taxes have been withheld from the paycheck before money is transferred to the emergency fund. This means that when employees choose to access their emergency savings, they won’t have to pay any taxes or penalties for “early withdrawal,” like they would with a retirement savings plan, such as a 401(k).
By contrast, employee contributions made to a traditional 401(k) are made pre-tax, meaning that the retirement savings plan contribution is made before state and federal taxes are withheld from the employee’s pay. Employer contributions to employee 401(k)s are tax-deductible for the employer as long as they don’t exceed IRS limitations.
Withdrawals from out-of-plan ESAs are not subject to any taxes or penalties. The same is true with in-plan ESAs for the first four withdrawals an employee makes within a plan year. On and after the fifth withdrawal, employees might have to pay “reasonable fees or charges.” Withdrawing funds from an in-plan ESA should not involve any additional taxes, that said.
In 2020, the Consumer Financial Protection Bureau (CFPB) released guidelines for employers around automatic savings (Autosave) plans. Autosave plans are a version of workplace ESAs that allow employers to automatically enroll employees into the plan, using a portion of the employee’s earnings as regular contributions. These plans are uncommon, and while they are not PLESAs, they share some features with PLESAs.
If employees already have a designated emergency savings account at any financial institution, they can use that as their Autosave account, and the employer would direct the payroll funds into that pre-existing account. For employees who do not already have an emergency savings fund, the employer opens a new savings account (at a financial institution chosen by the employer) and directs the payroll contributions to the new account.
Similar to a PLESA, employees would need to be given advance notification that their employer is automatically enrolling them in an Autosave plan (and contributing to it from the employee’s earnings). Also similar to a PLESA, if employees choose to opt out of the Autosave plan, they have the option to decline to participate.
While in-plan ESAs and some out-of-plan ESAs (such as an Autosave plan) allow employers to automatically enroll employees into the workplace ESA, there are clear disclosure requirements that employers must meet before they can implement automatic enrollment. Several states also have rules and requirements around state-mandated retirement plans and auto-enrollment in those plans. The biggest one is that employers must tell employees where their money is going before they are enrolled in one of these plans, and employers must give employees the opportunity to opt out and decide not to participate in the workplace ESA.
A PLESA should also include information about any withdrawal penalties or fees that might kick in if the employee makes more than four withdrawals from their workplace ESA within the same year.
A good rule for employers is to give employees as much clear and relevant information as possible, as frequently as possible. While it’s permissible to include in-plan ESA or Autosave disclosures along with other required disclosures for 401(k) plans, the more informed and educated employees are, the more confident they will feel in their financial decisions about their workplace ESA.
In terms of reporting, for the 2024 tax year, employers with PLESAs will have to report aggregated information about the plan in the IRS Form 5500: contributions, investments, fees and expenses, and distributions.
Once employers feel confident that they are fully apprised of all the compliance and regulatory details that affect their employee benefits plan, something is bound to change. So how can organizations maintain and refresh their repository of knowledge and education about these topics?
Both the IRS and the DOL provide resource centers that are full of information and guidance for employers, and both entities allow individuals to register for email updates about news for payroll professionals, tax law changes, and more.
The best way to keep yourself and your organization informed about any current or pending changes is to establish and cultivate an ongoing relationship with legal and compliance experts. These professionals are adept at following and understanding the latest developments in regulatory compliance, and they can tell you whether a change that recently pinged your radar is going to directly affect your company.
Whether your organization offers an in-plan or an out-of-plan workplace ESA — or whether you’re currently considering adding a workplace ESA to your benefits package — understanding the legal, regulatory, and compliance requirements will help you craft a benefit that resonates with employees, meets their emergency savings needs, and mitigates the risk to your company.
Staying up-to-date on the regulatory landscape, fulfilling your fiduciary responsibilities to employees, addressing the tax implications, and navigating compliance considerations are all vitally important to ensuring that your workplace ESA is a benefit you can continue to offer for years to come.