FLASHPOINT: Pension-Linked Emergency Savings Account Guideposts Issued
(PLESA? I hardly even know you.)
By Alison J. Cohen, J.D., APR
On January 12, and January 17, 2024, the Internal Revenue Service (“IRS”) and Department of Labor (“DOL”), respectively, issued guideposts for implementation of the Pension-Linked Emergency Savings Accounts (“PLESAs”). PLESAs were created under SECURE 2.0 Act of 2022 (“S2”), section 127 by both amending Internal Revenue Code (the “Code”) section 402A and adding Sections 801 through 804 to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), thereby invoking the jurisdiction of both the IRS and the DOL. The fact that both responsible agencies issued coordinated guidance is just this side of a miracle. S2 required that the agencies issue guidance within 12 months of the enactment date of S2 (i.e., by December 29, 2023). As Maxwell Smart would say, “Missed it by that much.”
What’s a PLESA Anyway?
Besides being a crazy new acronym for the pension world to enjoy, PLESAs were created to allow employers to assist non-highly compensated employees (“NHCEs”) to save within a defined contribution plan, a 403(b) plan, or a governmental 457(b) plan to handle emergency situations. Starting January 1, 2024, a plan may permit NHCEs who meet the plan’s eligibility requirements to set aside after-tax contributions into a special plan account. The funds in that account act as an emergency fund that the participant can access for more than only the hardship withdrawal reasons. Any contributions elected to go to the PLESA would be eligible for matching contribution, just like regular salary deferrals under the Plan.
Think about an NHCE whose car suffers a tire blow-out and who doesn’t have the money for a spare. That employee could withdraw funds from his or her PLESA to cover the cost of the spare and any repairs needed. Or consider the employee whose house plumbing goes on the fritz who could not normally afford to pay for the plumber.
The NHCE can have up to four PLESA distributions per year free of charge. After that, the plan can charge the participant a reasonable fee for additional distributions. (Who is paying in the interim? Unclear, but likely the plan sponsor will be footing the bill and not the recordkeepers or TPAs.)
Of course, as with everything in life, there are restrictions on this saving opportunity. The NHCE’s contributions to the PLESA cannot be more than $2,500 (the plan sponsor can make the amount less), and there are restrictions on how it gets invested. [Code section 402A(e)(3)(A)] PLESAs are optional provisions; the plan sponsor may offer them or not, and they can be removed at any time from the plan. S2 section 127 doesn’t provide details on how to make this all happen, which is why we needed guidance from the IRS and DOL.
What Did the DOL Have to Say About PLESAs?
The DOL issued its guidelines in the form of an FAQ on January 17, 2024. Under the DOL’s jurisdiction, the FAQ looks to clarify the PLESA-related requirements under the new ERISA sections 801 through 804. We discuss this first, since it is more substantive in nature than the IRS publication.
Eligibility Periods for PLESAs
Cryptically, FAQs -2 and -3 ask whether there can be a different eligibility period for the PLESA versus the rest of the plan. The DOL doesn’t answer this question with a yes or no, but does say that, according to ERISA section 801, people who meet the normal eligibility requirements and are not HCEs are required to be eligible for a PLESA. Further, ERISA section 801(b)(1) states that someone must meet the eligibility requirements of the plan to be an “eligible participant” for the PLESA. These two provisions, taken together, appear to us to preclude having either stricter or more lenient eligibility requirements for the PLESA than for the other portions of the plan.
What these provisions do not tell you is what the rule is if you have different eligibility requirements for different portions of the plan, particularly for salary deferrals vs. matching contributions. In particular, it is not clear whether a participant who is eligible for salary deferrals and the PLESA can be excluded from the matching contributions made based on the PLESA contributions if a longer eligibility requirement applies to the match. ERISA section 801(d)(4) requires that, “the employer shall make matching contributions on behalf of a participant on account of the contributions by the participant to the pension-linked emergency savings account at the same rate as any other matching contribution on account of an elective contribution by such participant.” Presumably the rate of match for a participant ineligible for matching contributions is 0% under both the salary deferral section and the PLESA provision. However, this is not specifically stated.
PLESA Automatic Enrollment
An employer can draft its plan to provide for an automatic enrollment provision in relation to the PLESA. Although we have nothing from the IRS or DOL, it is a conservative assumption that the mandatory automatic enrollment of S2 section 101 does not apply to PLESAs. Unlike regular automatic enrollment, the DOL FAQs require that a PLESA automatic enrollment must be 3% or less. There is no opportunity for automatic increase. Any election greater than 3% must be made as an affirmative election by the participant. This would be in addition to any automatic deferral provision in the plan that applies to normal salary deferrals. For example, a plan could provide for automatic enrollment of pretax deferrals at 5% and automatic enrollment into the PLESA at 3%, for a total of 8%.
The $2,500 Maximum for the PLESA
Interestingly, the DOL FAQ will allow the plan sponsor to elect whether to include or exclude earnings when calculating the $2,500 PLESA limit. Under the law itself, the statute limits the amount of the account attributable to participant contributions to $2,500. Taking this position is called the “exclusion” approach by the DOL (i.e., it excludes any earnings from the limitation calculation). Because it would constitute a lower limit, the DOL also permits the plan to limit contributions to the PLESA account when the account balance is $2,500 or more, including any accumulated earnings (i.e., the “inclusion” approach). The latter approach permits the recordkeeper to concentrate on the current balance, rather than the accumulated contributions. On the other hand, the payroll department or provider would not necessarily know, as of the payroll date, what the account had grown (or reduced, if losses) to, making it harder for the contribution amounts to be regulated at that level.
The IRS has not provided guidance on this, and that lack of actual guidance makes this particularly interesting because we do not know how to handle distributions under the exclusion approach. For example, let’s say that Sully has $2,000 in PLESA contributions and $400 in earnings in his account. When he needs to take a $1,000 distribution to pay a dental bill, does the entire $1,000 come from the PLESA contributions (essentially, a first-in-first-out approach), or would we need to pro rate the amount across PLESA contribution balance and earnings? This kind of proration was not required for distribution taxation purposes, as the Code treats a PLESA distribution like a qualified Roth distribution, under which nothing is taxable. It would certainly be easier administratively if the IRS assumed that the first dollars out are contributions, bypassing any need to perform the proration calculations and recordkeeping.
Another thing that the plan sponsor can’t do is impose additional annual limits on the contributions to the PLESA. The total contributions (or the account, if the inclusion approach is used) can never exceed $2,500 (or a lower limit set by the plan), but, if a participant takes a withdrawal, the participant can replenish the amount missing from the account. All employee contributions must be deposited within the same time period as regular deferrals, or it is a prohibited transaction.
Distribution restrictions are pretty minimal. A participant doesn’t have to provide any reason for the withdrawal, the participant must have access to a distribution at least once per calendar month (the plan sponsor can allow more), and the first four distributions won’t be subject to any distribution fee. The withdrawals can be done in any reasonable way (e.g., check, debit card, ACH). As mentioned above, the question mark over who pays the fees remains unanswered. However, while the law forbids charging most distribution fees, the FAQs allow the plan to charge reasonable fees for account administration, subject to ERISA fiduciary standards. The FAQs also prohibit charging so much for the fifth distribution that the plan or employer are essentially “recouping” the cost of the four prior distributions.
Investment of the PLESA
The DOL FAQ makes clear that the PLESA account is subject to a different type of designated investment option. The goal with the PLESA is to preserve the participant’s contributions and ensure liquidity. This is very different from the general plan qualified default investment alternative (“QDIA”), as we commonly understand it. Beware of using a stable value or GIC fund that might have restrictions on withdrawals or high back-end fees. A fund selection for a PLESA can still have fees or charges associated with it.
Another participant notice! Yeah! Yes, the DOL made clear that a PLESA notice must be sent out not less than 30 days, and not more than 90 days, prior to the first PLESA contribution. The notice is required regardless of whether the plan sponsor implements automatic enrollment for the PLESAs. The content of the detailed notice is very similar to the current automatic enrollment notice requirements. Content details can be found in ERISA section 801(d)(3). The good news is that this can be combined with several other notices, in an attempt to minimize the cost/burden on the plan sponsors. (While the law provides the DOL with authorization to issue a model notice, the DOL has politely declined to do so at this time. The DOL is evaluating whether it should do so.)
Form 5500 Changes
The FAQs note that the current Form 5500 does not have any PLESA-related sections, because PLESAs are not yet effective in 2023, the year for which the current form is effective. The DOL assures us that adding a Plan Characteristic Code to indicate that the plan has PLESA provisions. The DOL is also considering compliance-related questions. News at 11.
Okay, What Did the IRS Bestow Upon Us?
The reason we used the word “guidepost” to describe IRS Notice 2024-22 (the “Notice”) is that it failed to provide any details on how plan sponsors should be administering PLESAs. Instead, the Notice outlines the manner in which the plan sponsor can avoid potential abuse. In particular, some practitioners are concerned that an employee could make a PLESA contribution on Day 1, becoming eligible for a match, take a distribution of the PLESA contribution on Day 2, and then have another contribution of the same amount made on the next paycheck, which could also be subject to a match. In this manner, the participant would earn matching contributions (perhaps up to the maximum available) while failing to save any of the employee’s own money to the PLESA. The IRS added two provisions that are directed at this concern.
Order of Matching Contributions
When calculating matching contributions, a plan sponsor should first determine the match for any non-PLESA contributions made by the employee; then the employer should determine any remaining matching contribution attributable to the PLESA contributions.
Example: Mike W. has chosen to defer 5% of his $2,000 pay period compensation (i.e., $100) as non-PLESA contributions and 2.5% ($25) as PLESA contributions. The matching contribution formula is 25% of the first 6%. The match formula is applied to the non-PLESA amount first: $2,000 x 5% x 25% is $25. Even though Mike W. is deferring 2.5% to the PLESA, only 1% (6% maximum deferral to match, less the 5% normal deferral) can be matched. Therefore, the PLESA match is $2,000 x 1% ($20) x 25%, or $5.
Limitation on Annual Matching Contributions
“Ewwww,” you say? Yes. Ewww. The maximum match that can be made on account of a PLESA is the limit on participant contributions to the PLESA (or $2,500 for 2024). So, if the matching contribution formula is incredibly generous at 200% of each dollar contributed, you could not do a $5,000 match on a $2,500 participant contribution to the PLESA.
Further Procedures to Limit Manipulation of Matching Contributions
The IRS acknowledges that an employer may create procedures designed to reduce abuse. However, the Notice provides examples of some impermissible, i.e., unreasonable procedures, that the plan sponsor may not implement. First, a plan sponsor can’t forfeit any matching contributions attributable to a PLESA contribution just because the participant takes a withdrawal from that PLESA. Second, a plan sponsor cannot suspend a participant’s ability to make contributions to the PLESA when the participant takes a withdrawal. This is reminiscent of the old hardship suspension restrictions. Lastly, a plan sponsor may not suspend matching contributions to the participant made on account of participant elective deferrals to the plan.
Hopefully, we’ll get more substantive guidance from the IRS in the coming year.
We know just enough to be dangerous at this point, as far as administering PLESAs, and the likelihood of further guidance in the next six to nine months is pretty low. We remain skeptical that PLESAs make sense from an administrative cost/effort perspective. However, if plan sponsors are determined to implement the PLESA feature, they do so at some peril and should be extremely conservative in the decisions being made. Note that, consistent with other S2 changes, the employer can make the changes operationally and wait until 2026 (longer for governmental and some union plans) to memorialize them in the plan document.
If you have such a plan sponsor, and need some help, remember that we are your ERISA solution, and happy to help.
For more discussion of PLESAs, join Alison and Derrin on February 22 for a webcast on ERISApedia. Register at www.erisapedia.com.
- Posted by Ferenczy Benefits Law Center
- On January 29, 2024