SECURE 2.0 provides two optional opportunities for plan sponsors to provide participants access to funds for emergencies that will be available in 2024.
Providing access to funds for emergencies sounds attractive, but the administrative requirements of these provisions will likely make adoption slow. The first option requires a separate ‘sidecar account’ tied to a participant’s retirement account. There are many rules associated with this option that will be challenging to administer:
- Sidecar account contributions are capped at $2,500. Contributions in excess of $2,500 would be directed to the participant’s retirement account. Administering the change of funding from the sidecar account to the retirement account may prove challenging.
- Sidecar contributions are Roth-type after-tax contributions, creating administrative challenges if retirement contributions are to be made pre-tax.
- The employer selects the investment vehicle for sidecar accounts which must be a ‘principal protected investment.’
- Employer contributions are not allowed in the sidecar accounts. Plan sponsors and recordkeepers will need a way to ensure that any employer-matching contributions are going to the retirement plan as sidecar contributions are made.
- Withdrawals must be allowed at least once per month.
- Highly compensated employees are not eligible for the sidecar account, creating another administrative requirement that must be tracked.
- Sidecar contributions count against a participant’s 402(g) limit, which may create the potential for excess contributions if not tracked properly.
A separate and distinct account is thought to help participants understand that one account is for emergencies and the other for retirement. Also, because the ‘sidecar account’ must be invested in a ‘principal protected investment,’ the funds are segregated as short-term investments.
Additional guidance will be needed before recordkeepers and plan sponsors can offer these accounts. Currently, the administrative hurdles and complexity do not make this a viable option for plan sponsors.
The second option for emergency withdrawals is more straightforward and does not involve separate accounts. Participants could self-certify that they have an emergency and withdraw up to $1,000 directly from their retirement savings. They would have three years to repay the amount before being eligible for another emergency withdrawal. However, if they have repaid the amount, they would be eligible for another withdrawal within the three-year period.
One disadvantage of this option may be the market timing involved with a withdrawal. Retirement savings are long-term investments. The need for emergency withdrawals is often unexpected and may result in selling long-term investments to raise funds for the withdrawal at an inopportune time. However, the $1,000 limit and repayment requirements should serve as a sufficient guardrail to limit long-term negative impacts on the participant’s overall retirement savings strategy.
As participants struggle to meet short-term financial emergencies, these provisions may become popular in employer plans. However, these provisions, like many included in SECURE 2.0, come with administrative burdens that plan sponsors and recordkeepers need to be prepared for before implementation.
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