SECURE 2.0 introduced a variety of optional provisions that allow individuals to make penalty-free withdrawals from their retirement savings. These provisions are proving to be a recordkeeping nightmare for plan administrators who must track the different withdrawal and repayment options that may be adopted by plan sponsors. One of these options allows plan sponsors to fund a separate emergency savings account for non-highly compensated employees (making less than $155,000 annually). Technically titled a pension-linked emergency savings account, these have also been labeled ‘sidecar’ accounts.
The Department of Labor has issued guidance clarifying several components of this emergency savings provision. The guidance highlights the complexity of creating and maintaining these accounts and should be enough to make most plan sponsors look for a better option. Here are some of the rules a plan sponsor must follow if considering this option:
- Eligibility tracking to ensure individuals earning over $155,000 are not participating
- Fiduciary responsibility to ensure any fees associated with the ‘sidecar’ account are reasonable
- Monitoring contributions that are capped at $2,500
- Fiduciary responsibility for selecting the investment vehicle utilized for these accounts
In addition, the IRS has issued its own guidance on how to prevent participants from using the accounts as a revolving door to receive the employer match.
The benefit of providing $2,500 for emergency savings is significantly outweighed by the increased administrative and fiduciary burden placed on the plan sponsor. Despite the good intentions of the provision, adding these accounts to your retirement plan is impractical.
SECURE 2.0 included another emergency savings option that plan sponsors should adopt before looking at the ‘sidecar’ accounts. This provision allows for a one-time penalty free withdrawal of up to $1,000 from their retirement savings account. This removes the administrative burden of establishing and maintaining a separate account and the fiduciary responsibility of investment selection and fee monitoring required for the ‘sidecar’ accounts. This provision is easy to implement and provides the opportunity to monitor your employees' need for access to emergency withdrawals.
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