For generations, America has deployed the tax code to encourage workplace savings—tax-advantaged retirement plans and health savings accounts, for example. In “Can Tax Incentives Boost Workplace Emergency Savings?”, we explore how we might use a similar approach to support savings for emergencies in the workplace.

A critical first step in building financial resilience is the ability to cover unexpected expenses without going into debt or tapping into long-term savings, often in the form of an emergency savings account (ESA). A growing number of employers recognize the importance of ESAs in employee financial wellness, and we encourage policymakers to consider new and innovative policies to drive engagement with ESAs, informed by existing tax credits and incentives.

With the support of Blackrock’s Emergency Savings Initiative, Commonwealth partners with employers to identify and implement savings solutions—for example, employer-sponsored ESAs. ESAs provide a unique opportunity for employers to support employees’ financial health; however, it is critical that employers broadly adopt ESAs and that employees participate at high rates, especially those earning low-and-moderate income (LMI).

Our report reviews existing tax credits and incentives for employer-sponsored benefits to uncover how these might be applied to ESAs. We identify promising opportunities and challenges for policymakers to consider across these models closely and invite policymakers to join us in further exploring these concepts and developing effective policies to incentivize workplace emergency savings.

Recommendations on the Application of Existing Models of Tax Credits and Incentives to Employers-Sponsored ESAs

We looked at four models of incentives for workplace savings programs and identified the following opportunities and challenges:

1. Permitting pre-tax contributions and tax-advantaged matches to a workplace ESA—similar to the 401(k) model—would likely be impactful given its familiarity for employers and employees and incentives for both groups. However, concerns about the unrestricted use of funds in tax-advantaged accounts might negatively impact the political and practical feasibility.

2. Allowing employers to offer a tax-advantaged de minimis benefit like a small dollar seed fund would positively impact small dollar savings in an ESA—though the impact on long-term savings behavior is uncertain. Clear guidance on the amount and taxability of the seed fund would be essential for political feasibility.

3. Offering a tax credit for the startup costs of implementing an ESA could drive adoption by small businesses with high percentages of employees earning LMI in industries such as restaurants and retail. Many of these small businesses struggle to provide holistic workplace health and financial wellness benefits due to the cost of administration. To be politically feasible, the credit would likely need to be limited in amount and duration, such as covering startup costs for the first few years. It would also not provide a direct incentive to employees, which is a limitation.

4. A tax credit for employees to save in an ESA, delivered at the tax filing moment would provide a direct incentive for employees to contribute, yet may be challenging to implement politically and practically. As noted above, tax-advantaged savings accounts typically restrict the use of funds, which runs counter to the features of a high-quality ESA. Delivering the credit during tax filing—rather than tied to more immediate savings behavior—may limit the impact.

Each model could be applied to employer-sponsored ESAs and merit additional consideration by policymakers. However, the nature of a liquid, short-term savings account creates complexities in political viability and practical implementation compared to other, more restricted workplace savings programs.

Our Criteria for Assessing Tax Incentives and Credits

We established a set of criteria to inform our assessment of the most common tax credits and incentives for employer benefits including:

1. How the tax credit or incentives might impact the features of a high-quality emergency savings product—including no barriers to entry, low or no fees, liquidity (easy and quick withdrawal options), portability, and principal protection.
2. Practical feasibility—Ease of implementation of the tax credit or incentive in the real world— is the tax credit or incentive accessible by employers and/or by workers earning LMI?
3. Political feasibility—what is the likelihood of passage through a legislative or policy process, informed by previous legislative efforts to incentivize participation in other workplace savings benefits?

Evidence of potential impact—how likely is the incentive to drive participation and engagement with an ESA, particularly for workers earning LMI? We based this criterion on our research into incentives for ESAs and evidence from other incentives and workplace savings programs.

Next steps

As employer-sponsored ESAs continue to grow as a workplace benefit, employers, workplace-benefit providers, policymakers, and other stakeholders need to be creative in considering how to design incentives that ensure ESAs are widely accessible and reach all employees, especially those earning low and moderate incomes. We hope this review provides guidance and considerations for future policy opportunities to increase employee participation and engagement with emergency savings.

Contact us at info@buildcommonwealth.org to continue the conversation.