by Starting this year, a federal law allows employers to enroll workers in emergency savings accounts linked to their retirement accounts. But some companies, put off by the law’s complex rules, have begun offering emergency benefits outside of workplace retirement plans.
“I think there’s a huge interest in emergency savings programs,” said Matt Bahl, vice president and director of workplace financial health at Financial Health Network, a nonprofit that promotes financial wellness. “Having access to liquid cash can greatly reduce financial stress levels.”
The nonprofit Employee Benefits Research Institute found that about three-quarters of large employers (those with 500 or more workers) offered or planned to offer emergency or hardship assistance programs to workers on last year. Of those, about a third said they offered an emergency savings account feature and another third planned to do so within a year or two.
But while the law, known as Secure 2.0, has helped draw attention to the need to save for a rainy day, its rules for setting up emergency accounts within retirement plans are “clumsy,” Bahl said. For example, only workers who earn below a certain income limit ($155,000 by 2024) can participate, and their emergency savings are limited to $2,500, although employers can set lower limits. And while employers can help with contributions, they must deposit any matching contributions into the worker’s retirement account, not the emergency savings account.
While employers may eventually choose to offer these types of “sidecar” savings accounts, there are already standalone emergency savings programs available through fintech startups and established retirement plan administrators. With emergency savings offerings, “it’s really important that they be widely available and easy to use,” said Emily Kolle, a vice president who oversees the emergency savings offering at Fidelity Investments, one of the largest retirement plan administrators.
Emergency savings — a cushion of cash available in case of job loss or surprise expenses like car repairs or medical bills — are a concern for many Americans. In a recent survey According to financial site Bankrate, about a third said they would have to borrow to cover an unexpected $1,000 expense. And almost a quarter of consumers have without savings reserved for emergencies, according to the Consumer Financial Protection Bureau.
The Secure 2.0 law has two main provisions intended to help workers cover surprise expenses. First, it allows employers to automatically enroll workers in emergency savings plans added to their 401(k) accounts. (Separate account offerings, by contrast, cannot enroll workers by default; employees must opt-in.)
Second, employers can allow workers to withdraw up to $1,000 a year, penalty-free, from their retirement accounts to cover surprise expenses. (Employers may already offer “hardship” withdrawals from retirement plans, but workers generally owe a 10 percent tax penalty if they are under age 59½, in addition to ordinary income tax on the amount withdrawal).
The Plan Sponsor Council of America, a nonprofit group representing employers, found little interest in Secure 2.0 options. In a recent survey Of council members, only about 2 percent said they were interested in offering both savings and retirement options. Half said they were not interested in either option, while more than a third said they were unsure.
Some employers said in written comments in the survey that the time and cost required to offer the provisions was not worth it for employees. Others opposed linking rainy day savings and retirement savings, although one reason for offering emergency savings accounts is to reduce workers’ need to dip into retirement funds to manage personal financial difficulties.
Tom Armstrong, vice president of customer analytics and insights at financial services firm Voya Financial, said his data showed employees who lacked adequate emergency savings were 13 times more likely to make a “hardship” withdrawal from their account. retirement and 30 percent more likely to do so. reduce your retirement contributions.
Brian Graff, executive director of the American Retirement Association, a group that includes the council sponsoring employer plans, said many companies and plan administrators had focused on mandatory aspects of the strong Secure 2.0 law, such as a provision requiring better access to retirement plans. for part-time and long-term workers. They haven’t yet had time to fully consider whether to adopt other optional offerings, such as emergency savings, he said. “These are the early stages.”
At the same time, some employers have begun offering rainy-day savings tools outside of their workplace retirement plans. Details may vary by employer and provider.
In January, for example, Whole Foods Market began offering an emergency savings program through Fidelity. Workers can deposit funds through payroll deductions and withdraw them when necessary. It joined companies like Delta Air Lines, which began offering an emergency savings program through Fidelity in January 2023.
Employees who sign up for Delta’s program open a cash management account at Fidelity. After completing the required financial counseling, they receive a $750 deposit from Delta. The airline will then match up to $250 in employee contributions. As of last fall, 21,500 employees had participated, a Delta spokesperson said.
Here are some questions and answers about emergency savings:
What is a reasonable goal for an emergency savings fund?
That depends on your financial situation. A common rule of thumb is to save at least three months of living expenses, but that can seem daunting to some people. Research shows that even smaller savings balances can help people avoid turning to risky alternatives, like high-interest credit cards. America savesan initiative of the Consumer Federation of America, recommends aiming for $500 to start.
Is it better to save lump sums for emergencies or save little by little?
Either way, or a combination of both, can work, depending on what is best for your situation. Tax time has come and many taxpayers are getting a big refund. He average federal refund last year it was just under $3,200, the Internal Revenue Service reported. Leaving aside a part of your refund into a savings account can help you start your emergency fund.
Do I have to participate in a formal program to have money from my paycheck sent to a savings account?
Probably not. Most employers offer electronic deposit and allow “divided deposits” where you direct part of your paycheck to automatically go into a separate savings account. Ask your payroll department. Typically, you will need to fill out an application form with your bank account number. Alternatively, banks, credit unions, and many budgeting apps offer automatic transfers from your checking account to a savings account.
