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Initial Guidance Provided on Pension-Linked Emergency Savings Accounts
(Parker Tax Publishing January 2024)
The IRS provided initial guidance to employers on the creation of pension-linked emergency savings accounts (PLESAs), which are authorized under the SECURE 2.0 Act of 2022 for plan years beginning after December 31, 2023. The guidance provides reasonable measures under the anti-abuse rules in Code Sec. 402A(e)(12) that employers can take to discourage potential manipulation of the PLESA matching contribution rules. Notice 2024-22.
Background
Section 127 of the SECURE 2.0 Act of 2022 (Pub. L. 117-328) amended the Employee Retirement Income Security Act of 1974 (ERISA) and Code Sec. 402A to provide for the creation of pension-linked emergency savings accounts (PLESAs). In general, PLESAs are short-term savings accounts established and maintained in connection with a defined contribution plan and are treated as a type of designated Roth account.
Code Sec. 402A(e)(1)(A) provides that an applicable retirement plan (as defined under Code Sec. 402A(f)(1)) may include a PLESA established under Section 801 of ERISA, which, except as otherwise provided in Code Sec. 402A(e), is treated as a designated Roth account. Under Code Sec. 402A(e)(1)(A)(ii), an applicable retirement plan may either (1) offer to enroll an eligible participant in a PLESA or (2) automatically enroll an eligible participant in a PLESA pursuant to an automatic contribution arrangement. Further, under Code Sec. 402A(e)(1)(B), if an applicable retirement plan includes a PLESA, the plan must: (1) separately account for contributions to the PLESA (and any earnings properly allocable to the contributions), (2) maintain separate recordkeeping with respect to each PLESA, and (3) allow withdrawals from the PLESA in accordance with distribution rules described in Code Sec. 402A(e)(7), which permits a withdrawal at the participant's discretion, in whole or in part, at least once per month.
Under Code Sec. 402A(e)(2)(A), an eligible participant with regard to a defined contribution plan means an individual, without regard to whether the individual otherwise participates in the plan, who meets any age, service, and other eligibility requirements of the plan and is not a highly compensated employee (as defined in Code Sec. 414(q)). Pursuant to Code Sec. 402A(e)(2)(B), an eligible participant on whose behalf a PLESA is established who thereafter becomes a highly compensated employee cannot make further contributions to the PLESA but retains the right to withdraw any account balance in accordance with the rules in Code Sec. 402A(e)(7) and (8), which permit withdrawals upon termination of employment or plan termination.
Subject to certain excess contribution rules, Code Sec. 402A(e)(3)(A) provides that no contribution shall be accepted to a PLESA to the extent such contribution would cause the portion of the account balance attributable to participant contributions to exceed the lesser of (1) $2,500 or (2) an amount determined by the plan sponsor of the PLESA.
In general, under Code Sec. 402A(e)(6)(A), if an employer makes any matching contributions to a defined contribution plan of which a PLESA is a part, the employer must make matching contributions on behalf of an eligible participant on account of the participant's contributions to the PLESA. The matching contributions must be at the same rate as any other matching contribution on account of an elective contribution by the participant. The matching contributions will be made to the participant's account under the defined contribution plan which is not the PLESA. The matching contributions on account of contributions to the PLESA must not exceed the maximum account balance under Code Sec. 402A(e)(3)(A) for the plan year. Pursuant to Code Sec. 402A(e)(6)(B), for purposes of any applicable limitation on matching contributions, any matching contributions made under the plan are treated first as attributable to the elective deferrals of the participant other than contributions to a PLESA.
Pursuant to Code Sec. 402A(e)(7)(A), a PLESA generally must allow for withdrawal by the participant on whose behalf the account is established of the account balance, in whole or in part, at the participant's direction, at least once per calendar month. The distribution of such a withdrawal by the participant must be made as soon as practicable after the date on which the participant elects to make such withdrawal. Code Sec. 402A(e)(7)(B) provides that a distribution from a PLESA is treated as a qualified distribution for purposes of Code Sec. 402A(d) and treated as meeting the requirements of Code Secs. 401(k)(2)(B)(i), 403(b)(7)(A)(i), 403(b)(11), and Code Sec. 457(d)(1)(A).
Code Sec. 402A(e)(11) provides that, notwithstanding Code Sec. 411(d)(6), a plan which includes a PLESA may cease to offer such accounts at any time.
Code Sec. 402A(e)(12)(A) provides that a plan of which a PLESA is a part may employ reasonable procedures to limit the frequency or amount of matching contributions with respect to contributions to such account, solely to the extent necessary to prevent manipulation of the rules of the plan to cause matching contributions to exceed the intended amounts or frequency. Code Sec. 402A(e)(12)(B) provides that a plan of which a PLESA is a part is not required to suspend matching contributions following any participant withdrawal of contributions, including elective deferrals and employee contributions, whether or not matched and whether or not made pursuant to an automatic contribution arrangement.
The last sentence of Code Sec. 402A(e)(12) provides that the Secretary of the Treasury, in consultation with the Secretary of Labor, shall issue regulations or other guidance not later than 12 months after the date of the enactment of the SECURE 2.0 Act with respect to the anti-abuse rules described in Code Sec. 402A(e)(12).
Section 127(e)(2) of the SECURE 2.0 Act amends Code Sec. 72(t)(2) to add a new subparagraph (J). Code Sec. 72(t)(2)(J) generally provides that the 10 percent additional tax on early distributions from qualified retirement plans under Code Sec. 72(t)(1) does not apply to distributions from a PLESA. Section 127(e)(3) of the SECURE 2.0 Act amends Code Sec. 72(d) to add new paragraph (3). Code Sec. 72(d)(3) provides that, for purposes of Code Sec. 72, contributions to a PLESA to which Code Sec. 402A(e) applies (and any income allocable thereto) may be treated as a separate contract.
The amendments made by Section 127 of the SECURE 2.0 Act apply to plan years beginning after December 31, 2023.
Notice 2024-22
In Notice 2024-22, the IRS provides examples of anti-abuse procedures that are not reasonable and thus may not be used to limit the frequency or amount of matching contributions made to the account.
The guidance first highlights two statutory provisions of Code Sec. 402A(e) to which a plan might look to limit the ability of participants to manipulate the rules of the plan to cause matching contributions to exceed the intended amounts or frequency. These statutory provisions include:
(1) Order of matching contributions: Code Sec. 402A(e)(6)(B) provides that any matching contributions made under the plan are treated first as attributable to a participant's elective deferrals other than PLESA contributions. As a result, any elective deferrals a participant makes under the underlying defined contribution plan will be matched first and will lower the availability of matching contributions that will be made on account of participant contributions to their PLESA.
(2) Limitation on annual matching contributions: Code Sec. 402A(e)(6)(A) provides that matching contributions on account of contributions to the PLESA cannot exceed the maximum account balance set under Code Sec. 402A(e)(3)(A) ($2,500 (as adjusted for inflation after 2024)) or a lower amount set by the plan sponsor) for the plan year. Code Sec. 402A(e)(3)(A)(ii) also permits a plan sponsor to set a lower PLESA balance limit than the $2,500 limit under Code Sec. 402A(e)(3)(A)(i). A lower limit on the portion of the PLESA balance attributable to participant contributions would result in a correspondingly lower cap on annual matching contributions that would be required under Code Sec. 402A(e)(6)(A).
According to the IRS, a plan sponsor might view these provisions as sufficient anti-abuse provisions, and therefore decide not to impose any other restrictions meant to prevent manipulation of matching contributions. In such a case, for example, a plan sponsor may consider a participant as not manipulating the matching contribution rules if the participant made a $2,500 contribution in one year, received the matching contribution on such amount, and then took $2,500 in distributions that year and repeated that pattern in subsequent years.
Similarly, because plans are not required to permit participants to take more than one distribution per month, plan sponsors may view the option of limiting the number of permissible withdrawals to a maximum of once per month as a sufficient constraint on the potential to manipulate the matching contribution rules.
Procedures to Limit Manipulation of Matching Contributions
Under Code Sec. 402A(e)(12)(A), a plan of which a PLESA is a part may, but is not required to, employ reasonable procedures to limit the frequency or amount of matching contributions with respect to contributions to a PLESA. However, 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. If a plan sponsor decides to employ additional procedures to prevent abuse, Code Sec. 402A(e)(12)(A) provides that reasonable procedures are permitted solely to the extent necessary to prevent manipulation of the rules of the plan to cause matching contributions to exceed the intended amounts or frequency.
The IRS advised that 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 IRS has determined that procedures that are unreasonable for a plan sponsor to implement include, but are not limited to:
(1) 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;
(2) 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
(3) Suspension of matching contributions: A plan may not suspend matching contributions made on account of participant elective deferrals to the underlying defined contribution plan.
The IRS noted that certain stakeholders have expressed concerns regarding the application of Rev. Rul. 74-55 and Rev. Rul. 74-56 to PLESAs. The IRS stated that it does not view these rulings as applicable in the context of PLESAs, regardless of whether the contributions are matched.
For a discussion of pension-linked emergency savings accounts, see Parker Tax ¶131,157.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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