Emergency Savings Accounts (PLESAs): The 401(k) Feature Few Plans Use

When an employee's car breaks down or a medical bill arrives, the 401(k) is often the closest pool of money. Hardship withdrawals, loans, and cash-outs at job changes all pull money out of retirement savings, sometimes with taxes and penalties attached.

SECURE 2.0 created a feature designed to address that problem from inside the plan: the pension-linked emergency savings account, or PLESA. It has been available since 2024. Few plans have adopted it so far, but it is worth understanding, especially if your employees frequently tap their 401(k) for short-term needs.

Why emergency savings matter to a retirement plan

Employees without emergency savings are more likely to take money out of their retirement accounts early. Each early withdrawal reduces long-term savings and can trigger income tax and, for those under 59½, an additional 10% tax. Plan loans can lead to defaults when an employee leaves the company.

A dedicated emergency account gives employees a place to set aside a modest cushion without leaving the plan, and without the paperwork of a hardship withdrawal.

How a PLESA works

A PLESA is an optional feature in a 401(k), 403(b), or governmental 457(b) plan. Its main rules:

• Eligibility. Only employees who are not highly compensated employees can contribute. An employee who later becomes highly compensated can no longer contribute but can still withdraw.
• Roth contributions. Contributions are made from pay on a Roth, after-tax basis.
• Automatic enrollment is optional. A plan can automatically enroll eligible employees at up to 3% of pay, with the right to opt out or change the amount.
• Balance cap. The law caps the portion of the balance attributable to contributions at $2,500, adjusted for inflation over time. A plan can set a lower cap. Once the cap is reached, further contributions stop or can be redirected to the employee's regular 401(k) account if the plan allows.
• Conservative investments. PLESA money must be held in cash, an interest-bearing deposit account, or an investment designed to preserve principal.
• Frequent access. Participants must be able to withdraw at least once per calendar month, and the first four withdrawals each plan year cannot be charged fees. No proof of hardship is required.
• Tax treatment. Withdrawals are generally free of income tax and the 10% early withdrawal penalty.
• At separation. When employment ends, the participant can take the PLESA balance in cash or roll it into a Roth account in the plan or a Roth IRA.

PLESA contributions count toward the employee's regular annual deferral limit. They do not create additional contribution room.

How matching works

If the plan offers a match, PLESA contributions must be matched at the same rate as regular deferrals. The match is deposited into the employee's retirement account, not the PLESA itself. Matching contributions are attributed first to the employee's regular deferrals, and the match attributable to PLESA contributions is limited by the PLESA cap. Plans can adopt reasonable procedures to prevent people from contributing and withdrawing repeatedly just to collect the match, but they cannot forfeit matching contributions already made.

Plans must also send a notice at least 30 days, and no more than 90 days, before an employee's first PLESA contribution, and annually after that.

Why adoption has been slow

Interest from employers has been limited. A Plan Sponsor Council of America survey found that about 1% of responding plan sponsors offered a PLESA in 2024, while most said they were not considering one. Commonly cited reasons include:

• Administrative complexity. Separate accounting, monthly withdrawal processing, and balance cap tracking add work.
• Recordkeeper support. Not every recordkeeper offers the feature, particularly for smaller plans.
• The small cap. A $2,500 limit may feel too low to justify the effort.
• The highly compensated exclusion. Excluding some employees can complicate communication.

Bipartisan legislation introduced in Congress would raise the cap to $5,000 and allow highly compensated employees to participate. As of this writing, it has not become law.

Alternatives to consider

A PLESA is not the only way to help employees handle emergencies:

• Emergency personal expense distributions. Since 2024, plans can allow participants to withdraw up to $1,000 once per year for an unforeseeable or immediate financial need without the 10% early withdrawal penalty. The withdrawal is still taxable, and it can be repaid within three years.
• Hardship withdrawals. These remain available for qualifying needs, with their own rules and documentation.
• Plan loans. Loans can provide access to funds, though they come with repayment risk if employment ends.
• Out-of-plan emergency savings programs. Some employers offer payroll-deducted savings accounts through a separate provider, sometimes with an employer contribution.

Questions to ask before adding a PLESA

• How often do employees take hardship withdrawals, loans, or cash-outs from the plan today?
• Does our recordkeeper support PLESAs, and what does it cost?
• Would we automatically enroll employees, and at what rate?
• How would we explain the feature, including who is eligible?
• Would an emergency withdrawal feature or an outside savings program meet the same need more simply?

Curious whether an emergency savings feature makes sense for your plan? Brian Williams, CPFA®, of Northshire Consulting LLC | Registered Investment Advisory Firm helps business owners evaluate plan design options. Call 203-401-6062, email bwilliams@northshireconsulting.com, or visit northshireconsulting.com to schedule a plan review.

Frequently asked questions

Are PLESA contributions in addition to the regular 401(k) limit?

No. PLESA contributions count toward the employee's annual elective deferral limit along with their regular 401(k) contributions.

Can business owners contribute to a PLESA?

Generally, no. Anyone who owns more than 5% of the business is treated as a highly compensated employee under the tax rules, and highly compensated employees cannot contribute to a PLESA.

If we add a PLESA, can we remove it later?

Yes. A plan sponsor can end the PLESA feature. Participants would then have their balances distributed or transferred according to the plan's terms.

This material is for educational purposes only and is not individualized investment, tax, or legal advice. Advisory services are offered through Northshire Consulting LLC | Registered Investment Advisory Firm.