The rise of out-of-plan ESAs: Unveiling the dominant future of emergency savings

As Americans continue to struggle to save for unexpected expenses, employers are seeking additional ways to help their workers achieve financial stability. Out-of-plan emergency savings accounts (ESAs) have emerged as a popular employee benefit that can be offered independently from other funds.

Out-of-plan ESAs are standalone savings accounts separate from an individual’s retirement account. Unlike traditional in-plan ESAs, which are tied to an employee’s retirement plan and have restrictions on savings amounts and withdrawals, out-of-plan ESAs are offered by employers as a separate benefit.

These accounts provide employees with the flexibility to save as much as they want and access their savings on demand without any penalties, offering a level of autonomy not typically found with emergency funds built into retirement offerings. Under the SECURE 2.0 Act, new options have emerged for in-plan ESAs, with notable restrictions around eligibility and withdrawals; however, out-of-plan ESAs continue to stand out because of their unique advantages. 

Seeking autonomy and personalized solutions

The emergence of out-of-plan ESAs has changed the landscape for people who are seeking more autonomy and personalized solutions for their emergency savings strategies. A significant advantage is their availability to any type of employee, including part-time and hourly workers — which isn’t always the case for in-plan ESAs.

Out-of-plan funds provide all types of employees with greater control over their emergency savings strategies, allowing them to save money directly from their paychecks — autonomy that’s particularly beneficial for part-time or seasonal workers who may not qualify for a retirement savings plan.

Out-of-plan ESAs also offer flexibility that empowers individuals to choose options that fit them best, including: 

• Financial institutions
• Account structures
• Flexible contribution amounts 

This flexibility is a significant advantage over in-plan ESAs, which are subject to ERISA and cap each individuals’ savings amount at $2,500, plus have restrictions around emergency fund withdrawals. Many out-of-plan ESAs are hosted through independent third-party platforms that make it easier for users to manage their accounts and access funds more quickly — giving them greater control over money when time is of the essence.

Technological advancements and digital accessibility

Technology has played a pivotal role in the growth of out-of-plan ESAs. With the increasing prevalence of digital technology, it’s easier than ever for individuals to manage their finances, and out-of-plan ESAs are no exception.

Digital platforms, mobile apps, and online tools have transformed the way Americans interact with their finances — and this is especially true for managing employee benefits. Users can easily access their out-of-plan ESAs at their convenience. With easy-to-use technology, ESA providers like SecureSave provide an online portal and/or mobile app for users to do things like: 

• Start or stop ESA contributions
• Change their contribution rate 
• Transfer funds
• And more

These digital tools also provide real-time updates, allowing users to keep track of their savings and make informed decisions. There’s something empowering about being able to monitor the growth of your savings over time. In fact, the majority (61.5%) of SecureSave users log in to their account at least once a month, which suggests that they are closely monitoring the emergency funds they’re accumulating. 

Such intuitive out-of-plan platforms also make it easy for organizations to facilitate their ESA programs and incorporate features like payroll match, as well as signup and milestone bonuses, to further incentivize employee participation. 

Enhanced saving and investment opportunities

Out-of-plan ESAs offer much more freedom and possibilities when it comes to both saving and investing. The fact that they’re available to any individual regardless of employment type opens up a significant savings option for seasonal, part-time, and hourly workers who may not be eligible for retirement plans.

The flexibility around out-of-plan savings is notable since there is no limit to the amount of funds individuals are able to save in a year, compared to the $2,500 cap on in-plan ESAs subject to ERISA. Employees who receive an unexpected bonus or salary increase, for example, may opt to channel these extra funds into their ESA and grow their emergency fund more quickly. 

Compared to traditional savings accounts, out-of-plan ESAs tend to offer higher interest rates, with the potential for higher returns over time as the account grows. Moreover, individuals have complete control over where and when they move their money.

Building the savings that enables individuals to explore additional investment mechanisms offers pathways to wealth accumulation to which certain disadvantaged populations may have historically not had access. Viewed from a long-term savings perspective, out-of-plan ESAs extend beyond the mere act of saving and involve strategically growing wealth with the future in mind.

Out-of-plan ESAs vs. traditional in-plan ESAs

We’ve already touched on this, but to clarify further, let’s define in-plan versus out-of-plan ESAs:

• An in-plan ESA is an emergency savings account administered within a defined contribution retirement savings plan, like 401(k) or 403(b) retirement plans. It’s sometimes called a “sidecar” emergency savings account and allows for direct payroll contributions from the employee. Access to these ESAs is limited to employees with a retirement plan.
• An out-of-plan ESA is also an emergency savings plan sponsored by employers, but it’s not tied to a retirement savings account and is therefore open to any type of employee. This separation provides more flexibility and solutions for both employers and individual employees.

In-plan ESAs offer the advantage of being tied to a retirement plan, which allows for direct payroll contributions. But they come with some potential drawbacks, including:

• Limited inclusivity for high earners: Highly compensated employees may not qualify for certain credits and cannot enroll in pension-linked emergency savings accounts (PLESAs). Since employers are responsible for monitoring compliance, this may complicate the program or limit its reach within an organization.
• Only available to eligible employees: Employees must be eligible for a retirement plan in order to qualify for an in-plan ESA. This makes these plans inaccessible for many seasonal and part-time workers.
• Contribution caps: In-plan ESAs limit contributions to $2,500, but employers have the authority to set even lower caps. Funds exceeding this limit are automatically directed into retirement accounts, which restricts how much an employee can save for emergencies within the ESA. Plus, any employer contributions go directly into individuals’ retirement accounts and cannot be accessed as emergency funds.
• Portability issues: If an employee leaves an organization, transferring an in-plan ESA is challenging. They need to either cash out their funds or roll them into a retirement plan, which can be complicated if the new employer doesn’t offer a similar ESA option.
• ERISA & SECURE 2.0 compliance: Adhering to the Employment Retirement Income Security Act (ERISA) guidelines and new SECURE 2.0 Act guidance can complicate the administrative process for HR and finance departments, possibly increasing workload instead of streamlining it.
• Withdrawal confusion: Since the ESA is linked to the retirement account, employees may find the withdrawal process during emergencies confusing and lengthy. There’s always a risk of accidentally drawing from retirement savings instead of the ESA due to plan complexities, which could come with penalties.

Out-of-plan ESAs, on the other hand, offer several notable benefits:

• Greater employer flexibility: Employers can tailor out-of-plan ESAs to fit the needs of their workforce, including offering them to part-time or seasonal workers and creating different structures for hourly versus salaried employees.
• Available to all employee types: Since they aren’t linked to retirement savings, any type of employee can participate in out-of-plan ESAs. This opens up emergency savings to hourly, part-time, and seasonal workers.
• No contribution limits: There is no cap on employee contributions, allowing them to save more than the $2,500 in-plan limit. This enables individuals to save more in order to cover larger emergencies or achieve the recommended emergency savings goals of three to six months' expenses minimum, or even more.
• Ease of access: Funds in an out-of-plan ESA tend to be more easily accessible for employees during an emergency since these accounts aren’t bound by ERISA guidelines and are separate from retirement savings. Withdrawals can also be faster — often in 1-2 days via ACH.
• Simpler management for HR: Human Resources and finance departments might find out-of-plan ESAs easier to administer because they’re exempt from ERISA regulations and plan implementation is therefore more straightforward.
• Greater portability: If an employee leaves the organization, out-of-plan ESAs offer more options for portability, beyond cashing out or rolling funds into retirement savings. This helps facilitate a smoother transition and leaves the individual in full control of their emergency fund.

As mentioned previously, however, companies that already have defined contribution plans may find it more expensive to offer a separate out-of-plan ESA compared to an in-plan option.

Embracing the era of out-of-plan ESAs

Organizations that understand and leverage the benefits of out-of-plan ESAs can help facilitate financial wellness for their entire employee base, from temporary or part-time hourly, to salaried staff. 

These accounts are easily accessible and flexible, empowering employees to handle financial emergencies while taking control of their financial health. And since out-of-plan ESAs are customizable, employers can add bonuses and payroll match to further encourage saving.