The Employee Benefits Security Administration (EBSA), a U.S. Department of Labor (DOL) division, has issued guidance to clarify several aspects of these emergency savings accounts. This guidance outlines the complexity inherent for plan sponsors in creating and maintaining these accounts for plan participants. Additionally, the Internal Revenue Service (IRS) has issued guidance on sidecar accounts, explaining how to prevent employees from using the account as a so-called "revolving door" solely to receive the employer match.
Based on the guidance from two agencies, these accounts are likely not the best option for plan administrators to choose due to the increased fiduciary and administrative burdens they present. For instance, if plan sponsors do opt for PLESAs, they must follow these rules:
- Track eligibility of employees to ensure that highly compensated employees are not participating;
- Abide by a fiduciary duty to ensure that participants are charged only reasonable fees in connection with the accounts;
- Monitor contributions, which are capped at $2,500; and
- Take on the fiduciary responsibility of selecting the appropriate investment vehicle for the accounts.
A better alternative under SECURE 2.0 might be the provision that allows a plan participant a one-time penalty-free withdrawal of up to $1,000 from their retirement savings account. This provision is easy to implement and carries no added fiduciary responsibility. It also removes the added administrative burden of creating and maintaining a separate sidecar account.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties.
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