Employers can now enroll employees in some emergency savings accounts

Starting this year, a federal law allows employers to enroll workers in emergency savings accounts linked to their retirement accounts. But some companies, deterred by the law's complex rules, have started offering rainy day benefits outside of workplace retirement plans.

“I think there's tremendous interest in emergency savings programs,” says Matt Bahl, vice president and chief financial officer of workplace financial health at the Financial Health Network, a nonprofit organization that promotes financial wellness. “Having access to liquid cash can significantly reduce financial stress.”

The Employee Benefit Research Institute, a nonprofit organization, found that about three-quarters of large employers (those with 500 or more employees) offered or planned to offer hardship or emergency assistance programs to employees last year. About a third of them said they offered an emergency savings account feature and another third planned to do so in the next two years.

But while the law, known as Secure 2.0, has helped draw attention to the need for rainy-day savings, the rules for setting up emergency accounts within retirement plans are “clunky,” Mr. Bahl said. For example, only workers earning below a certain income limit ($155,000 for 2024) are allowed to participate, and their emergency savings are capped at $2,500, although employers can set lower ceilings. And while employers can help with contributions, they must put any amount into the employee's retirement account – not into the emergency savings account.

While employers may ultimately choose to offer such “sidecar” savings accounts, standalone emergency savings programs are already available from start-up financial technology companies and established retirement plan administrators. With emergency savings offerings, “it's really important that they are widely available and easy to use,” said Emily Kolle, a vice president who oversees emergency savings offerings at Fidelity Investments, one of the largest retirement plan administrators.

Emergency savings — a cash cushion available in the event of job loss or unexpected expenses such as car repairs or medical bills — is a concern for many Americans. In a recent one questionnaire According to financial site Bankrate, about a third said they would have to borrow to cover an unexpected expense of $1,000. And almost a quarter of consumers have that too no savings reserved for emergencies, according to the Consumer Financial Protection Bureau.

The Secure 2.0 law has two key provisions intended to help employees cover unexpected costs. First, it allows employers to automatically enroll workers in emergency savings plans tied to their 401(k) accounts. (Stand-alone account offerings, on the other hand, don't allow employees to opt in by default; employees must choose to opt in.)

Second, employers may let employees withdraw up to $1,000 per year, without penalty, from their retirement accounts to cover unexpected expenses. (Employers may already offer “hardship” withdrawals from retirement plans, but employees typically owe a 10 percent tax penalty if they are under age 59½, in addition to ordinary income taxes on the amount withdrawn.)

The Plan Sponsor Council of America, a nonprofit organization that represents employers, found lukewarm interest in the Secure 2.0 options. In a recent study of council members, only about 2 percent said they were interested in offering both savings and withdrawal options. Half said they weren't interested in either option, while more than a third said they weren't sure.

Some employers said in written comments on the survey that the time and expense required to provide the benefits were not worth their value to employees. Others objected to linking rainy day savings and retirement savings – even though one of the reasons for offering emergency savings accounts is to reduce the need for employees to tap retirement funds to solve personal financial problems.

Tom Armstrong, vice president of customer analytics and insights at financial services firm Voya Financial, said the data shows that workers who don't have sufficient emergency savings are 13 times more likely to take a “hardship” withdrawal from their retirement account. and 30 percent more likely to do so. reduce their pension contributions.

Brian Graff, CEO of the American Retirement Association, an umbrella group that includes the Retirement Plan Employer Council, said many companies and plan administrators had focused on mandatory aspects of the onerous Secure 2.0 law — such as a provision that would allow greater access to retirement plans required. for long-term and part-time workers. They haven't had time yet to fully consider whether to take up other optional offers, such as emergency savings, he said. “It's an early stage.”

At the same time, some employers have begun offering rainy day savings tools outside of their workplace retirement plans. Details may vary by employer and provider.

In January for example. Whole Foods Market began offering an emergency savings program through Fidelity. Employees can have money deposited through payroll deductions and withdraw it as needed. It joined companies like Delta Air Lines, which began offering an emergency savings program through Fidelity in January 2023.

Employees who enroll in Delta's program open a cash management account with Fidelity. After completing the required financial coaching, they will receive a $750 deposit from Delta. The airline will then match up to $250 in employee contributions. Last fall, 21,500 employees had participated, a Delta spokesperson said.

Here are some questions and answers about emergency savings:

What is a reasonable goal for an emergency savings fund?

That depends on your financial situation. A general rule of thumb is to save at least three months of living expenses, but that can seem intimidating to some people. Research shows that even smaller savings can help people avoid turning to risky alternatives, such as high-interest credit cards. America savesan initiative of the Consumer Federation of America, recommends starting with $500.

Is it better to save a lump sum for emergencies or to save a little bit at a time?

Either way – or a combination of both – can work, depending on what's best for your situation. It's tax time and many filers are getting a significant refund. The average federal reimbursement last year it was just under $3,200, the Internal Revenue Service reported. Set aside A part of your refund in a savings account can help you start your emergency fund.

Do I need to participate in a formal program to have money sent from my paycheck to a savings account?

Probably not. Most employers offer and allow electronic deposits “split deposits,” where you automatically transfer part of your salary to a separate savings account. Ask your payroll department about this. Normally you have to fill in an application form with your bank account number. Alternatively, banks, credit unions and many budgeting apps offer automatic transfers from your checking account to a savings account.