Coming Soon: A New Way for Employees to Build an Emergency Savings

Part of a series  |  SECURE 2.0 Act Insights

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Saving for retirement is a huge challenge for many Americans — so is saving for emergencies. Find out how the SECURE 2.0 Act is helping your employees prepare for both.

For many workers, it's a struggle to put money away for long-term needs like retirement savings while also building an emergency fund for any unexpected challenges around the corner. In fact, a recent survey found that just 43% of Americans could cover an emergency expense of $1,000 or more with their current savings.

In 2024, the SECURE 2.0 Act will introduce a provision to help employees increase their emergency savings while simultaneously saving for retirement.

How the emergency savings account will work

Beginning next year, employers may offer non-highly compensated employees an option to link their retirement plan to an emergency savings account. Employees may make Roth (after-tax) contributions until the account maxes out at $2,500 (or a lesser limit established by the employer).

Once the cap is reached, additional contributions can be directed to the employee's defined contribution plan or put on hold until the balance falls below the limit, at which point the employee can start contributing again.

Employers may automatically opt employees into these accounts at a rate of up to 3% of eligible wages. No employer contributions are permitted into the emergency savings account, and employees may choose to opt-out entirely.

If matching contributions are made on behalf of salary deferrals to the linked defined contribution plan, the employee will also be entitled to the matching contribution with respect to the contributions made by the participant to the emergency savings account, subject to the plan's matching contribution limit. If an employee is terminated or voluntarily leaves the company, any funds from the emergency savings account can be converted to another Roth account or cashed out by the individual.

Making an emergency withdrawal

Balances in an emergency savings account are eligible for distribution at least once per month and the first 4 distributions in a year must be free from any distribution fees.

Generally, a 10% penalty applies to early distributions from retirement accounts such as 401(k) plans. Withdrawals from an emergency savings account, however, are penalty-free and don't require proof of a qualifying emergency cause.

The IRS is expected to provide additional guidance on these accounts before the end of the year.

Bottom line: Whether an employee experiences a natural disaster, a health hardship or an unforeseeable family tragedy, an emergency savings account can provide funds to draw on without having to take out a high-interest loan, increase costly credit card debt or tap into a retirement savings account. In addition, having an emergency savings account can help employees feel more comfortable saving for retirement since they have funds set aside in case of emergency.

Employees are looking to employers for support.

The new emergency savings option is just one way in which employers can empower employees to develop a safety net and improve their financial outlook.

Employee-focused pay solutions such as paycards, earned wage access and financial wellness education can also help employees reduce financial-related stress and improve their financial literacy. For example, Wisely by ADP® offers employees a convenient, paperless paycard with early direct deposit access, single-touch bill pay and more.

If you're still deciding on a plan for your business, connect with an ADP retirement specialist for guidance and get your questions answered.

The SECURE 2.0 Act has 90+ provisions — need help keeping up? Here's your Complete Guide to the SECURE 2.0 Act of 2022

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ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor.