Under Secure 2.0, retirement savers will find it easier to draw on their funds should an emergency strike. Though COVID-19 has reinforced the critical importance of emergency savings, there are some concerns among financial experts that it might become too easy to tap funds intended for use as we age.
Emergency Provisions
Secure 2.0 provides two ways for savers to access retirement savings in the event life brings unexpected challenges. Both are set to begin in 2024, so plan sponsors need to understand them and be prepared to respond appropriately. Nevin Adams at the National Association of Plan Advisors explains that the first of the provisions is fairly straightforward, though the second is fraught with some complications which may make proper administration tricky. According to Section 115 of Secure 2.0, beginning in 2024: “a participant may generally make a withdrawal of up to $1,000 per year from their retirement account for certain emergencies. The withdrawal may be taxable (unless drawn from Roth) and MAY be repaid within three years, but it will not be subject to the 10% penalty for early withdrawals. Only one withdrawal is permitted per the three-year repayment period—if the first withdrawal has not been repaid.”
As Adams further explains, Section 127 of Secure 2.0 details the second provision for the use of retirement plan savings in emergencies and is “confusingly” referred to as “Pension Linked Emergency Savings Accounts”:
Beginning in 2024, it will ALLOW (not require) employers to create an Emergency Savings Account (ESA) as part of a defined contribution plan (401(k) or 403(b)). Only non-highly compensated employees may contribute to the account, though employers MAY auto-enroll such individuals in an EAS up to 3% of their compensation, and the EAS value cannot exceed $2,500[iv] (indexed for inflation). All employee contributions to this emergency savings account MUST be made on an after-tax basis—and each month participants may take withdrawals from the account (just to further complicate administration, the first four withdrawals for a year cannot be subject to distribution fees). Oh—and speaking of complications, those employee contributions must be treated as elective deferrals for purposes of any matching contributions. The matching contributions are treated by a plan no differently than matching contributions made on account of elective deferrals.
Indeed, there’s a great deal wrapped up in Secure 2.0, prompting ERISA specialists at the Wagner Law Group to point out: “plan sponsors and advisers need to be aware of the various time frames for each specific law and how to manage them accordingly.”
Clearly, for plan sponsors, another important action is having coverage to protect themselves in case mistakes are made in the rollout and implementation of new provisions. Though contracts with service providers can reduce the risk of personal liability for a breach, plan sponsors can never fully eliminate this risk. Remember, ERISA fidelity bonds, though required by the Department of Labor, do not provide protection for unintended acts—only fiduciary liability insurance does. Colonial’s reasonably priced and easy to obtain Fiduciary+Cyber coverage package, ensures sponsors and their businesses are protected with defense costs and penalty limits up to $1,000,000, if faced with claims of alleged or actual fiduciary breaches of duty in connection with the employee retirement plan. The Cyber Liability coverage is even included at no extra cost. Get protected, in minutes now:
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Interesting Perspective
Although Secure 2.0 has been widely praised throughout the retirement industry, some of the many provisions bundled up in it are not without their critics. For example, while access to emergency savings is a good thing, too much of a good thing, can sometimes lead to trouble. Adams, for example, makes this observation about Section 127:
Aside from the obvious administrative complexities of this option (certainly for the plan sponsor/recordkeeper), it’s by no means clear that this kind of set up won’t create a kind of “Christmas club” account, with individuals withdrawing these contributions for just about any reason every year (just) long enough to get the match—and then the next year they could do it all over again. And again. The Treasury is authorized to issue regulations to prevent abuse, but there’s no telling if or when (or what) those rules would be.
Though much remains unclear, this much is certain for plan sponsors: Peace of mind is best! Obtain Fiduciary+Cyber protection, affordably, with a 1, 2, or 3 year commitment.
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