The Secure 2.0 Act created a new account type called pension-linked emergency savings accounts or ESAs. ESAs can be made available through employer sponsored retirement plans for plan years beginning after December 31, 2023.
This new account type has plenty of potential loopholes for employees, although most of them Congress was aware of when they passed the notice.
In my original article on the topic, the first loophole I identified I called “Employer Match Churning.” This is the topic of the IRS’s new Notice 2024-22 released on January 12, 2024 as initial guidance for pension-linked emergency savings accounts (PLESAs).
The federal authors summarize this loophole as:
…plan sponsors might be concerned that a participant could nevertheless contribute to the participant’s PLESA and take distributions in a way that maximizes matching contributions received but maintains little to no contributions in the PLESA.
In the Secure 2.0 Act, Congress gave plan sponsors the authority to create “reasonable procedures” to prevent this. This new IRS notice is the start of the guidance on what kind of procedures might or might not be allowed.
The IRS authors suggest:
A reasonable anti-abuse procedure is one that 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. Plan sponsors may find it challenging to identify participants engaging in manipulative practices because those participants may be able to adapt their pattern of contributions and distributions to replicate patterns of participants making contributions and taking periodic distributions for legitimate purposes, such as unexpected expenses. The Treasury Department and IRS have determined that procedures that are unreasonable for a plan sponsor to implement include, but are not limited to:
- Forfeiture of matching contributions: A plan may not provide that matching contributions already made on account of participant contributions to the PLESA will be forfeited by reason of a participant’s withdrawal from a PLESA;
- Suspension of participant contributions to PLESA: A plan may not suspend a participant’s ability to contribute to the participant’s PLESA on account of a withdrawal from the PLESA; and
- Suspension of matching contributions on participant contributions to the underlying defined contribution plan: A plan may not suspend matching contributions made on account of participant elective deferrals to the underlying defined contribution plan.
In other words, the IRS identified three procedures that you are not allowed to do.
- You can’t claw back employer match contributions that have already been made.
- You can’t remove the ability of a participant to contribute to the pension-linked emergency savings account.
- You can’t stop employer matching on regular retirement contributions.
What procedure can you put in place to prevent employer match churning? That is still unclear.
Presumably, the solution will be putting a maximum on the PLESA contributions eligible for an employer match. However, whenever that maximum resets, the employee would have the opportunity to churn the account to get more match out of the employer.
As I have alluded to before, this unique account type requires employer expense to establish and provides no benefit to any of the owners or highly compensated employees. For this reason, I predict there won’t be many employer plans which adopt this account type.
Regardless, take advantage of this one if you can. If you can’t, do not worry; the benefit available from it is small anyway.
Photo by Leslie Cross on Unsplash. Image has been cropped.