Skip to content
E is for ERISA

E is for ERISA

Information of use to benefits advisers and benefit plan sponsors.

  • About
    • Testimonials
  • Earlier Posts
  • Disclaimer
    • Privacy Policy
Posted on February 16, 2021February 16, 2021

Emergency Savings Accounts: Top 5 Things to Know

by Christine Roberts.In 401(k) Plans, Financial Wellness.Leave a Comment on Emergency Savings Accounts: Top 5 Things to Know

As a wise, NYU Stern School of Business Professor named Scott Galloway once said, “[t]he most powerful forward-looking indicator of your financial freedom is not how much you earn, but how much you save.”  But saving, like weight loss, is difficult.  Everyone knows how it works, but very few succeed at it consistently over the long term.  Employers are increasingly leveraging their role as paymaster to help employees save, before they have a chance to spend, with after-tax emergency savings accounts (ESAs).    In an ESA, employees defer a portion of their pay just as with a 401(k) plan, but with after-tax funds (ESAs can even be established as a “side car” to a 401(k) plan).  Employers send after-tax funds to a savings account on which employees can draw to deal with unexpected or planned expenses.

What are some key takeaways for employers who may be thinking of adding this option to their employee benefit menu?

1. Make it voluntary.

Auto-enrollment ESAs are a thing, but state wage and hour laws governing payroll deductions may pose obstacles.  Also, prior financial demands such as student loans, high-interest credit cards, and child support obligations may prevent some employees from participating.  Making an ESA voluntary does not mean, however, that you need to be passive.  In your enrollment materials, include a “suggested” savings rate of a meaningful percentage of pay, and illustrate what it would amount to over 18 months or so of steady accumulation (and compound interest).  

 2. Think of it as an adjunct to your retirement plan, not an obstacle.

Employers may hesitate to add an after-tax emergency savings account when their employees are not taking full advantage of their after-tax 401(k) or other retirement plan, or have a high number of 401(k) plan loans or hardship withdrawals.  This is a valid concern, but employers should not assume that it is a zero-sum equation.  Short-term cash crunches are what are driving those plan loans and hardship withdrawals, and may be depressing employee salary deferrals as well.  By equipping employees with a way to save money for short-term needs, an ESA may actually make them better long-term savers under the qualified plan.   

3. Consider a matching contribution.

Just as with a 401(k) plan, “free money” in the form of employer matching funds will encourage employees to make use of an ESA.   Consider whether you want to match a percentage of every after-tax dollar saved, or provide a matching contribution only when certain savings targets are reached, in order to incentivize participation in the ESA over time.  

4. Ensure ease of access to savings.

The secret sauce of ESAs is ease of access to the funds when the inevitable unexpected expense arises.  This is to be contrasted with participant loans or hardship withdrawals from a 401(k), both of which require a significant amount of paperwork and hence which can take days or even weeks to process.  Work with a vendor to ensure that employees can have access funds quickly and easily through electronic transfer or debit cards, and that details about their withdrawals are not available to you as employer.    De-identified data about withdrawals, if available from your vendor, however, may help you better design your ESA for your employee population.  

5. Supplement with other financial wellness tools.

If you implement an ESA, supplement it with other financial wellness tools that may be on offer, including from your 401(k) recordkeeper.  The short-terms savings that an ESA can make possible are only one part of the picture; long-term savings and budgeting are equally important.   If an ESA is successful, it will make employees feel more empowered about their financies and hopefully a more receptive audience to the lessons financial wellness modules can impart. 

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2021 Christine P. Roberts, all rights reserved.

Photo credit: Shane, Unsplash

Share this:

  • Email
  • Print
  • LinkedIn
  • Twitter

Related

Emergency Savings Account

Leave a Reply Cancel reply

Fill in your details below or click an icon to log in:

Gravatar
WordPress.com Logo

You are commenting using your WordPress.com account. ( Log Out /  Change )

Google photo

You are commenting using your Google account. ( Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. ( Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. ( Log Out /  Change )

Cancel

Connecting to %s

Post navigation

Previous Previous post: In Rehire Mode? Keep March 31, 2021 in Mind for Your 401(k) Plan
Next Next post: Happy 10th Birthday, EforERISA

Article Categories

Latest Posts

  • Happy 10th Birthday, EforERISA
  • Emergency Savings Accounts: Top 5 Things to Know
  • In Rehire Mode? Keep March 31, 2021 in Mind for Your 401(k) Plan
  • Honey, I Shrunk the Incentive: EEOC Proposes Wellness Regulations
  • COVID-19 Vaccines: Employer Mandate & Incentive Issues UPDATED

Blogs We Follow

  • BenefitsLink
  • Employee Benefit Adviser
  • Fiduciary Guidance Counsel
  • Health Affairs Blog
  • Mullen & Henzell L.L.P.
  • Nerd's Eye View
  • The Law Firm for Non-Profits
  • The Security Ledger
  • Top of Mind – Cammack Retirement

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 615 other followers

Follow E is for ERISA on WordPress.com


View Christine Roberts's profile on LinkedIn

Articles by Christine

  • RSS - Posts

Follow me on Twitter

  • Happy 10th Birthday, EforERISA! Celebrating the 10th anniversary of launching my benefits blog with a fresh new lo… twitter.com/i/web/status/1… 1 week ago
  • Emergency Savings Accounts: Top 5 Things to Know eforerisa.com/2021/02/16/eme… 2 weeks ago

Article Categories

Pages

  • About
    • Testimonials
  • Earlier Posts
  • Disclaimer
    • Privacy Policy

Contact Information

Christine P. Roberts
Mullen & Henzell L.L.P.
112 E. Victoria St.
Santa Barbara, California 93101
tel (805) 966-1501
fax (805) 966-9204
croberts@mullenlaw.com

Recent Posts

  • Happy 10th Birthday, EforERISA February 20, 2021
  • Emergency Savings Accounts: Top 5 Things to Know February 16, 2021
Follow E is for ERISA on WordPress.com
Blog at WordPress.com.
  • About
    • Testimonials
  • Earlier Posts
  • Disclaimer
    • Privacy Policy
loading Cancel
Post was not sent - check your email addresses!
Email check failed, please try again
Sorry, your blog cannot share posts by email.