The passage of two emergency savings provisions as part of the SECURE 2.0 Act of 2022 underscores Congress’s clear recognition of emergency savings’ critical role in enhancing retirement security and overall financial well-being. As of January 1, 2024, these provisions—optional for plan sponsors—are now in full effect and are beginning to impact savers and the financial services industry.

One change that some plan sponsors have incorporated allows certain defined contribution (DC) retirement plan participants to withdraw up to $1,000 for an emergency, penalty-free. Participants must replenish the withdrawn amount before a subsequent emergency distribution is allowed during the following three years.

The second provision allows DC plan sponsors to automatically enroll workers into “pension-linked emergency savings accounts” (PLESAs) at up to 3% of post-tax pay alongside retirement account contributions. Employees can opt out or change their contribution, and the account balance is limited to $2,500 (not counting any employer contributions). Savers can withdraw funds from the PLESA tax-free and penalty-free at any time.

Beginning in 2023, the Bipartisan Policy Center and Commonwealth initiated a series of discussions, as part of BlackRock’s Emergency Savings Initiative, with congressional staff, federal agency officials, private-sector practitioners, employers, and policy experts to evaluate the current emergency savings policy landscape and the impact of SECURE 2.0 while charting a vision for continued progress. These roundtable conversations—the most recent of which happened in June 2024—have yielded three major takeaways for policymakers:

1. According to recordkeepers, the $1,000 withdrawal provision has seen interest among plan sponsors due to its administrative simplicity. Still, only a small cohort of early adopters have acted on that interest and added the provision to their plan. Among those that have added the $1,000 withdrawal provision, it remains unclear how many are marketing the feature to participants. Plan participants would benefit from improvements to the user experience, and the policy community has yet to fully estimate the provision’s impact on retirement security and financial well-being.
2. Some plan sponsors have expressed interest in offering PLESAs because of the potential benefits to employees, but most recordkeepers and plan sponsors are hesitant to move forward. Stakeholders are coalescing around key reform options that could simplify PLESAs and make them much more attractive for plan sponsors, recordkeepers, and employees.
3. Lawmakers’ recent emphasis on emergency savings has magnified its role as a potential employee benefit, leading to growth in the market for programs administered by third parties separate from retirement plan recordkeepers (also known as “out-of-plan” emergency savings accounts). Congress now has the opportunity to create parity in the emergency savings policy landscape by allowing out-of-plan accounts to leverage key automatic enrollment features like their PLESA counterparts. Doing so would especially support those workers who currently lack access to workplace retirement plans.

Early Adoption and Implementation Insights

As recordkeepers anticipated in 2023, the $1,000 withdrawal provision has seen interest from plan sponsors and participants, with retirement savers already making qualifying withdrawals. Both employers and employees value the simplicity of this option. Some stakeholders have expressed concern that it only adds a new avenue for assets to leak from retirement accounts; however, plan leakage does not seem to be a significant problem so far. The allowable withdrawal amount is much lower than existing money-out options such as loans and hardship withdrawals, which could reduce leakage overall. Participating plan sponsors and recordkeepers report that repayments are being completed within a shorter time frame than expected, aided by continued regular contributions being credited toward the repayment.

Recordkeepers and plan sponsors are introducing the new withdrawal option, and both are focused on enhancements to the user experience while assessing the provision’s impact on retirement security and financial well-being. In particular, these stakeholders are exploring ways to ensure employees know this option and understand how it interacts with other options, such as loans and hardship withdrawals. Suggested enhancements may require regulatory guidance, such as encouraging repayment at the point of withdrawal by increasing the contribution amount to replenish the account more quickly, which could have the effect of making the transaction operate more like a loan.

Moving forward, it will also be important for stakeholders and the policy community to measure the impact of the $1,000 withdrawal provision on retirement plan participation, plan leakage, and employees’ ability to manage unexpected expenses. Commonwealth has already begun this work with multiple plan sponsors; for example, early results and research show promise around increasing plan participation.

The Potential of PLESAs

Advocates are eager to see PLESAs robustly implemented, as the ability of such plans to incorporate automatic features and employer-matching contributions could supercharge their effect on savers’ overall financial security. Moreover, there is evidence of employee demand for emergency savings solutions directly within the retirement plan—and the PLESA model. Some plan sponsors have signaled interest in exploring the option, but myriad requirements in SECURE 2.0 make creating and administering PLESAs complex. Especially given the existence of other easier-to-implement options like the $1,000 withdrawal and out-of-plan solutions, recordkeepers and plan sponsors are hesitant to move forward without various legislative and regulatory changes.

For example, recordkeepers suggest that the current law’s exclusion of highly-compensated employees (HCEs, or employees who earn more than $107,432 in 2024 or who own more than 5% of the business) is unnecessary and difficult to implement, in part because it is cumbersome to track employees moving in and out of the HCE designation. This exclusion was included in SECURE 2.0 to avoid extending more tax incentives to higher earners. Still, the $2,500 cap on PLESAs makes these incentives very small, and allowing HCEs to participate would have little effect on either equity or federal tax revenue. In addition, plan sponsors and recordkeepers would have an easier time implementing an annual contribution limit than the current balance limit. Increasing that limit to $5,000 to align with the true cost of major emergency expenses and the reported average amount of hardship withdrawals could be a boon for savers.

The Rise of Out-of-Plan Emergency Savings 

SECURE 2.0’s focus on emergency savings supercharged interest in providing solutions both within and beyond the bill’s scope as an employee benefit, and companies such as Fidelity, T. Rowe Price, SecureSave, SoFi, and Sunny Day Fund have stepped in to fulfill that demand with emergency savings accounts administered separately from retirement plans. These out-of-plan accounts provide flexibility and offer advantages, such as portability between jobs and the ability for employers to provide “seed funding” and matching contributions. These attractive features have led to significantly increased implementation in the past several years, with highly visible examples from companies like Delta, Humana, Starbucks, and Whole Foods.

However, these out-of-plan options cannot currently leverage the automatic features that dramatically increase retirement plan participation—features that PLESAs can implement. Legislative action could provide parity, allowing PLESAs and out-of-plan accounts to compete on an even footing. Establishing clear guidelines for defining an out-of-plan emergency savings account eligible for automatic enrollment is an important first step. Additionally, incorporating tools that have dramatically increased uptake will promote further implementation. Automatic enrollment and incentive structures are simple methods to ensure these plans reach employees who would benefit most.

Moving Forward

SECURE 2.0 has made significant strides in promoting emergency savings accumulation, addressing the vital need for liquidity, and highlighting the intersection of short-term savings and retirement security. Initial reports on implementation are encouraging, but achieving broader adoption and impact will require a combination of regulatory change, legislative action, and practical implementation by recordkeepers, plan sponsors, and other key players like payroll providers. SECURE 2.0 established a strong foundation for future advancements and set the stage for more work to improve Americans’ financial security.

The Bipartisan Policy Center is a Washington, D.C.-based think tank that actively fosters bipartisanship by combining the best ideas from both parties to promote security and opportunity for all Americans. Our policy solutions are the product of informed deliberations by former elected and appointed officials, business and labor leaders, and academics and advocates who represent both sides of the political spectrum. BPC has the trust and credibility in Washington and across the country to work on pressing issues in a constructive way. Learn more at www.bipartisanpolicy.org.