With the recent passing of SECURE 2.0, the government is making progress to tackle the leakage issue by utilizing some of the same features that make the 401(k) work so well.3 The new bill introduces the “Emergency Savings Account.” If adopted into the plan, it will allow participants to use automatic salary deductions to build up an emergency savings balance. The big picture is that if participants can build those additional savings, and access those, they won’t have to pull from their 401(k). This new law allows participants to take up to four penalty-free distributions per year. They also do not have to worry about taxes on their distributions, because they are treated as Roth contributions and are taxed before going into the account.
As a retirement plan fiduciary committee, this is a great opportunity to make a positive impact on employees and help them increase their financial security. The bill also allows employers to automatically enroll participants into the emergency savings account, giving them the same ability to opt out that they have in the retirement plan. Just like in their 401(k)s, this changes the question that participants are asked from, “Do you want to opt-in?” to, “Do you want to opt out?”
It’s important to note that participants can only contribute a maximum of $2,500 per year to the account. One of the best components of the new legislation is that if the participant reaches their $2,500 contribution limit, the additional savings do not stop. They are placed in the retirement plan instead. This will encourage participants to continue their good saving habits and increase the likelihood that they will maximize their contributions down the road.
When it is used correctly it can dramatically impact retirement readiness. With the decrease in leakage from the plan, it is expected that average plan balances will rise. Automatic salary deductions will continue to prove to be a great resource for employers to help employees get on track for retirement.
And this is just the start of improving the overall retirement readiness for American workers.
If you would like to learn more about the benefits of the new emergency savings account provision under SECURE Act 2.0, reach out to our experts today!
