Limited Adoption of Emergency Savings Options in 401(k) Plans

Despite the introduction of provisions under the Secure Act 2.0 allowing for emergency savings options within 401(k) plans, employer adoption remains low. A recent Vanguard report indicates that only 4% of employers permit $1,000 emergency withdrawals from 401(k) accounts, and there has been minimal interest in establishing 401(k)-linked emergency savings accounts. These accounts were designed to address the growing concern regarding Americans' insufficient emergency savings.

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The Secure Act 2.0, enacted in 2022, aimed to enhance retirement savings options by allowing the creation of pension-linked emergency savings accounts as a "sidecar" to existing 401(k) plans. Contributions to these accounts are treated as after-tax Roth contributions and count toward the overall 401(k) contribution limit, which is set at $24,500 for 2026, with an additional $8,000 for individuals aged 50 and older. The maximum annual contribution for the emergency savings account is capped at $2,500, adjusted for inflation.

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While the majority of employers (94% as of 2024) already allow access to retirement savings in cases of financial hardship, the implementation of the new emergency savings options has been met with hesitation. Will Hansen, executive director of the Plan Sponsor Council of America, noted that employers are likely to analyze the ease of implementation when considering these options. The $1,000 withdrawal feature is perceived as simpler compared to establishing a 401(k)-linked account, which presents administrative complexities, particularly concerning eligibility for highly compensated employees.

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In response to the challenges faced by employers, a bipartisan bill known as the Emergency Savings Enhancement Act was introduced in December in both the House and Senate. This legislation aims to expand eligibility for the 401(k)-linked accounts by removing the exclusion for highly compensated employees and increasing the annual contribution limit to $5,000. Brandie Barrows, a partner with Hall Benefits Law, emphasized that removing the exclusion and raising the contribution limit could enhance the utility of these accounts.

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Critics argue that the slow uptake of these emergency savings options reflects a broader issue within employer-sponsored retirement plans. The lack of interest in 401(k)-linked accounts may hinder employees' ability to build adequate emergency savings, which is crucial for financial stability. The administrative challenges associated with these accounts, particularly regarding income fluctuations among employees, have also been highlighted as a significant barrier to adoption.

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As employers continue to evaluate the feasibility of integrating emergency savings options into their 401(k) plans, the potential passage of the Emergency Savings Enhancement Act could significantly alter the landscape. If enacted, this legislation may encourage more employers to adopt these provisions, ultimately benefiting employees' financial security.

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• “If a plan sponsor wants to move forward with an emergency savings program at their company, they're going to analyze the options available, and part of that [analysis] will be what's easiest to implement,” — Will Hansen, Executive Director, Plan Sponsor Council of America

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• “It wouldn't hurt to take that exclusion off and increase the amount that people can save,” — Brandie Barrows, Partner, Hall Benefits Law

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