With the passage of the SECURE 2.0 Act, Congress approved a number of changes to traditional employer-sponsored retirement plans to encourage people to save.
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One of the biggest changes, especially for people making less than $155,000 a year, is the creation of Pension-Linked Emergency Savings Accounts (PLESAs).
Here's a closer look at PLESA, including insights from financial advisors about how PLESA can impact your retirement savings.
What is PLESA?
As the name suggests, PLESA aims to provide employees with an emergency cushion. A $2,500 cushion to be exact. As of January 2024, an employer can offer her PLESA as part of an existing retirement plan and match employee contributions at the same rate as other employer-matched retirement accounts. You can also match her PLESA.
Unlike other employer-sponsored retirement accounts, PLESA must be made up of Roth contributions. This basically means that your employer contributes your after-tax income, so you don't pay taxes when you withdraw from your account.
Another big difference from other employer-matched retirement plans is that employees can withdraw from PLESA up to once a month. If the account balance falls below her $2,500, the employee (or an employee with the assistance of an employer match) may replenish the account, but the total contribution must exceed her $2,500. You can not.
How will an employer-matched savings account affect my existing retirement account?
Brian Dobbis, head of the IRA business at investment management firm Lord, Abbett & Co LLC, identifies two key aspects of PLESA contributions in his detailed overview of PLESA.
First, Dobis said, “If a participant's PLESA contributions exceed the maximum $2,500, the plan may provide that the participant may elect to increase contributions to the Roth account.” ing.
So even if an employee contributes more than the limit, it's no big deal. If you have a Roth account, you can choose to transfer your excess contributions to that account.
Second, Dobis notes that “PLESA contributions appear to count toward the employee's annual salary deferral limit.”
This difference is likely to affect employees' retirement benefits. Contributions to PLESA come from the same selective salary deferral pool as other employer-sponsored 401(k)s, etc., so contributing to PLESA reduces the amount you can contribute to other accounts.
The elective salary deferral limit for 2024 is $23,000. This means that if an employee (or employee and employer match) fully funds her PLESA, he can only contribute $20,500 to other Payroll Deferral Restricted Accounts.
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This article originally appeared on GOBankingRates.com: I'm a Financial Advisor: How Employer-Matched Savings Accounts Affect Your Benefits
