Beginning in 2024, the SECURE 2.0 Act enables employers to offer non-highly compensated employees the opportunity to contribute to emergency savings accounts linked to their company's defined contribution retirement plans, such as 401(k) plans. This guide will explain the key details you should know about these accounts. Key Features of Emergency Savings Accounts
Contributions to these emergency savings accounts are made into a designated Roth account, meaning they are "after-tax" and do not reduce your taxable salary. The maximum balance for these accounts is initially set at $2,500, subject to future inflation adjustments, or it may be lower if specified by the plan. Withdrawals from these accounts can be made tax-free on a federal level, as often as once a month, for emergency expenses without demonstrating the emergency nature of the expense. This flexibility allows you to use the funds as you see fit. Should your account balance dip below the cap, you can make additional contributions until the cap is reached again. Upon leaving the company, you can cash out the remaining balance in your emergency savings account.
Recordkeeping and Automatic Enrollment Your company must maintain separate records for your emergency savings account transactions, including all contributions. Employers may also automatically enroll employees in this program, setting contributions at up to 3% of salary, although employees have the option to opt out or adjust their contribution rate.
Matching Contributions If your employer offers matching contributions to the linked defined contribution plan, those matches can extend to the amounts you contribute to your emergency savings account. However, these matches will accrue in your regular retirement plan account rather than in the emergency savings account itself.
The combined total of your contributions and any employer matches must not exceed the set cap of $2,500 or a lower limit if established by your plan. Some plans may also exclude earnings on the emergency account from these cap limitations.
Investment and Preservation Guidelines Under ERISA regulations, emergency savings account balances must be held in vehicles that are either cash, interest-bearing deposits, or investments designed to preserve principal and provide a reasonable return consistent with liquidity needs. The primary goals here are to preserve capital and ensure liquidity, allowing employees immediate access to funds for unforeseen financial needs.
Further Resources For additional information, the IRS and U.S. Department of Labor offer FAQs to clarify the workings of these new emergency savings accounts. If your employer provides this option, you will receive detailed information to help you make an informed decision about participating. Reynolds + Rowella is here to assist with any questions you may have regarding the new emergency savings accounts or other financial planning needs.
Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve. Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.
