SECURE Act 2.0: DOL and IRS Issue Coordinated Guidance on PLESAs

The US Department of Labor and Internal Revenue Service have issued coordinated guidance on the pension-linked emergency savings account (PLESA), a new in-plan emergency savings account feature created by the SECURE 2.0 Act of 2022. While in theory plan sponsors could adopt PLESAs as early as the first day of the plan year beginning after December 31, 2023, PLESAs present a number of administrative challenges, and SECURE 2.0 left unanswered questions that have caused many to hesitate to adopt.

As summarized in our prior LawFlash, PLESAs are short-term savings accounts within a defined contribution plan (such as a 401(k) or 403(b) plan) that would allow eligible non–highly compensated employees to make Roth (after-tax) contributions up to a specified amount (currently $2,500, but indexed for cost-of-living increases in future years) and that can be withdrawn at any time at their discretion without needing to satisfy any particular rules or requirements or being subject to early distribution penalties.

The DOL’s guidance focuses on clarifying and interpreting the various PLESA requirements outlined in SECURE 2.0, while the IRS’s guidance focuses solely on the design elements that plan sponsors can utilize to prevent participants from abusing the PLESA feature as a way to get employer match and immediately withdraw deferrals (i.e., no intent to save toward retirement).

DEPARTMENT OF LABOR FAQS

The DOL released FAQs in January 2024 containing general compliance information about how plans can administer PLESAs. The FAQs provide additional helpful details about the DOL’s interpretation of the SECURE 2.0 PLESA rules.

No Minimum Required Contribution Amount. SECURE 2.0 provided that plans cannot require a minimum opening or ongoing balance for a PLESA (e.g., must contribute $100 to open or maintain at least $100).

The FAQs provide a few additional examples of impermissible practices that indirectly have the same result:

• Closure and liquidation of a PLESA if the balance drops below a set amount
• Penalties or loss of rights (e.g., suspension of withdrawal rights) if the balance drops below a specified amount
• Minimum per pay period contribution
• Imposition of a separate annual contribution limit for participants other than the account-based limit and the Internal Revenue Code (Code) Section 402(g) limit ($23,000 for 2024); so, participants may repeatedly withdraw and replenish funds in the PLESA at any time, subject to the $2,500 limit (discussed in greater detail below)

While a plan sponsor may not impose the limits described above, the FAQs clarify that plans may require PLESA contributions to be made in percentage-based increments of no less than 1% provided that such requirement is uniformly applied to other participant contributions in the plan (i.e., participant deferrals) and participants are allowed to elect whole dollar amount contributions as an alternative. In addition, participants can be automatically enrolled in PLESA contributions (at a maximum rate of 3% of compensation), all PLESA contributions must be eligible for matching contributions, and PLESA contributions count toward the Code Section 402(g) limit ($23,000 for 2024).

Two Choices As to Whether Earnings Count Toward the Account Balance Limit. The $2,500 limit on account balances (indexed for future cost-of-living increases) can be applied using the “exclusion approach” or “inclusion approach,” as elected by the plan sponsor:

• Under the exclusion approach, earnings do not count toward the $2,500 limit, so participants can contribute a “gross” Roth amount up to $2,500 and any earnings that push the account balance over $2,500 would not violate the contribution limit. Because the PLESA rules require separate accounting of contributions and earnings, this approach should not impose any additional administrative burdens on the part of recordkeepers.
• Under the inclusion approach, earnings count toward the $2,500 limit so that the participant cannot make any additional Roth contributions once the total account balance equals $2,500. This means the actual amount the participant contributes generally would be less than $2,500, depending on the investment returns. While this approach has some appeal because the plan only needs to look to the account balance to determine whether any additional contributions can be made, it would be expected to result in a lower total PLESA account balance for participants compared with the exclusion approach.

Certain Permissible Fees on PLESAs. Under SECURE 2.0, plans cannot charge fees on the first four withdrawals from a PLESA during the plan year. Plans may charge “reasonable” fees for withdrawals after the fourth withdrawal of the year. The FAQs do not define what constitutes a “reasonable fee” but do clarify that a fee that is effectively a fee on the first four withdrawals cannot be charged.

This restriction does not preclude charging reasonable fees and expenses associated with the administration of PLESAs directly to the PLESAs or to the entire plan. However, the imposition of the administrative fees is subject to the ERISA fiduciary standards and these fees, as noted below, will be reported on Form 5500 (thus PLESA administrative fees and expenses will be accessible by the public, including the plaintiffs’ bar, which might dissuade some plans and recordkeepers from charging any amount for PLESAs).

Investment Requirement. As described in our prior LawFlash, a PLESA must be invested in an interest-bearing deposit account or an investment product designed to preserve capital and liquidity and generate a reasonable rate of return. The FAQs reiterate this and, by way of example, indicate that that the investment option for PLESAs generally may not be the same as the plan’s qualified default investment alternative (QDIA) due to the different nature of the investment product appropriate for PLESAs (for example, many plans use target-date funds for their QDIA rather than the money market or stable value funds that the PLESA rules contemplate).

Reporting and Disclosure. The FAQs clarify that because PLESAs have their own separate 30-90 day initial notice and annual notice disclosure requirements (for which the DOL may issue a model notice), ERISA Section 105 pension benefit statements or Section 404(a)(5) fee disclosures will not be required to address a plan’s PLESA feature. A new code will be added to the list of Plan Characteristic Codes for Forms 5500 and 5500-SF for plans to indicate if they contain a PLESA feature, but it appears likely that the financial information for the PLESA need not be reported separately from the other plan information.

Some other points that should be fairly apparent include that participants must be permitted to contribute if they satisfy any age and service requirements under the plan. This appears to mean that long-term part-time employees cannot be excluded from a PLESA arrangement. Because contributions to a PLESA are treated like any other contributions to the plan, they must be eligible for matching on the same basis as other contributions and remitted on the same required timing (as soon as administratively practicable, but no later than the 15th day of the next calendar month). Plans cannot automatically enroll participants at a rate of higher than 3% without their consent.

IRS ANTI-ABUSE GUIDANCE

The IRS released initial guidance, Notice 2024-22, in January 2024 to clarify the discretionary anti-abuse procedures referenced under SECURE 2.0. Contributions to a PLESA must be eligible for matching contributions at the same match rate as any non-PLESA elective deferrals. As such, there may be concerns that participants could abuse the PLESA matching contribution rule by repeatedly making PLESA contributions and withdrawing the account balance just to receive a matching contribution.

The Notice includes an example of a participant repeating a pattern of contributing $2,500 to a PLESA each plan year, receiving a match on that amount, and then making a withdrawal in the same year right after receiving the matching contribution.

The IRS notes that the relevant statutory language of the Code may be viewed as providing sufficient anti-abuse protection because

• any matching contributions will be applied to non-PLESA elective deferrals first, thus lowering the remaining match amount attributable to the PLESA contributions (notably, this does not resolve the IRS’s example of abuse where the participant only contributes $2,500 to the PLESA and makes no other elective deferrals);
• the matching contributions on account of PLESA contributions cannot exceed the maximum PLESA balance limit ($2,500), which may even be reduced if a plan sponsor decides to set a lower PLESA balance limit; and
• plan sponsors may limit PLESA withdrawals to no more than once per month (thus somewhat constraining the ability to manipulate matching contribution rules).

For any plan sponsor looking to utilize additional procedures to prevent potential abuse by plan participants, the Notice clarifies that “reasonable procedures” are permitted solely to the extent necessary to prevent potential manipulation of PLESA contributions. The only affirmative guidance the IRS provides is that a reasonable anti-abuse procedure “balances the interests of participants in using the PLESA for its intended purpose with the interests of plan sponsors in preventing manipulation of the plan’s matching contribution rules.”

That being said, the Notice does provide examples of plan sponsor actions that are not reasonable:

• Forfeiting matching contributions already provided because a participant makes a withdrawal from their PLESA
• Suspending a participant’s deferrals to a PLESA because the participant withdrew amounts from their PLESA (this suspension would also be prohibited under the DOL guidance)
• Suspending matching contributions (which is also likely prohibited under DOL guidance)

These examples seem to indicate that any potentially “retaliatory” action by a plan sponsor in response to a participant’s withdrawal from a PLESA may be considered unreasonable. The IRS suggests that individuals who are truly abusing the provisions may be difficult to identify because the behaviors they are engaging in could just as easily be legitimate activity.

While we see some patterns that sponsors could identify over time and some circumstances where the sponsor could be certain (i.e., employee admits this is their goal), the IRS’s statements suggest that the agency is perhaps not as concerned about going after plan sponsors for potential abuses by the participants to the extent that plan sponsors are acting in good faith to comply.

The IRS is soliciting comments related to reasonable anti-abuse procedures and, in particular, helpful examples of reasonable procedures to incentivize PLESA participation while discouraging abuse, so we expect to see more IRS guidance on PLESA anti-abuse rules.

NEXT STEPS

SECURE 2.0 gives the DOL and IRS the authority to issue (and coordinate to issue) guidance related to PLESAs, suggesting a few areas in particular that are not specifically addressed by this IRS and DOL guidance, including expanding correction programs, issuing model plan language and notices, and interaction of the PLESA rules with the safe harbor rules.

As such, we expect there will be further guidance to come. Visit our centralized portal, which aggregates our insights and analyses of SECURE 2.0, for any future updates.