Starting this year, a federal law allows employers to enroll employees in emergency savings accounts linked to their retirement accounts. However, some companies, deterred by the law's complexities, have begun offering adverse day benefits outside of company pension plans.
“I think there's tremendous interest in emergency savings programs,” said Matt Bahl, vice president and director of workplace financial health at the Financial Health Network, a nonprofit organization that promotes financial wellness. “Access to liquid assets can significantly reduce financial stress.”
The Employee Benefit Research Institute, a nonprofit organization, found that about three-quarters of large employers (those with 500 or more workers) offered or planned to offer employee assistance programs during hardship or emergencies last year. Of them, about a third said they would offer an emergency savings account feature, and another third planned to do so in the next one to two years.
But while the law, known as “Secure 2.0,” has helped focus attention on the need for rainy-day savings, its rules for setting up emergency accounts as part of retirement plans are “cumbersome,” Mr. Bahl said. For example, only employees whose income is below a certain income limit ($155,000 for 2024) are allowed to participate, and their emergency savings are capped at $2,500, although employers can set lower limits. And although employers can help with contributions, they must pay the remaining amount into the employee's retirement account – not the emergency savings account.
Even if employers eventually decide to offer such “sidecar” savings accounts, standalone emergency savings programs are already available from financial technology startups and established retirement plan administrators. When it comes to emergency savings offerings, “what's really important is that they're widely available and easy to use,” said Emily Kolle, a vice president who oversees the emergency savings offering at Fidelity Investments, one of the largest retirement plan administrators.
Emergency savings — a cushion of cash in the event of a job loss or surprise expenses like car repairs or medical bills — are a concern for many Americans. In a recent survey by financial site Bankrate, about a third said they would need to borrow to cover an unexpected $1,000 expense. And nearly a quarter of consumers don't have emergency savings, according to the Consumer Financial Protection Bureau.
The Secure 2.0 Act contains two main provisions designed to help workers cover unexpected expenses. First, it allows employers to automatically enroll employees in emergency savings plans that are added to their 401(k) accounts. (In contrast, standalone account offerings do not allow employees to be enrolled by default; employees must opt-in to enroll.)
Second, employers can allow employees to withdraw up to $1,000 per year from their retirement accounts to cover unexpected expenses without penalty. (Employers may already offer “hardship” retirement plan withdrawals, but employees typically must pay a 10 percent tax penalty in addition to ordinary income tax on the amount withdrawn if they are under age 59½.)
The Plan Sponsor Council of America, a nonprofit employer advocacy group, found lukewarm interest in Secure 2.0 options. In a recent survey of council members, only about 2 percent said they were interested in offering both savings and withdrawal options. Half said they were not interested in either option, while more than a third said they were unsure.
Some employers indicated in written comments to the survey that the time and cost of providing the provisions was not worth their value to employees. Others objected to linking emergency savings accounts to retirement savings — although one reason for offering emergency savings accounts is to reduce workers' need to dip into retirement funds to deal with personal financial difficulties.
Tom Armstrong, vice president of customer analytics and insights at financial services firm Voya Financial, said the data shows that employees who don't have enough emergency savings are 13 times more likely and 30 percent more likely to experience hardship “Withdrawals from your retirement account would reduce your retirement contributions.
Brian Graff, chief executive of the American Retirement Association, an umbrella group that includes the Employer Plan Sponsors Council, said many companies and plan administrators have focused on mandatory aspects of the sprawling Secure 2.0 law – such as a provision that would improve access to Retirement plans require long-term part-time employees. They haven't had time to fully consider whether to introduce other optional offerings, such as emergency savings, he said. “It’s an early stage.”
At the same time, some employers have begun offering savings programs outside of their company pension plans. Details may vary depending on the employer and provider.
In January, for example, Whole Foods Market began offering an emergency savings program through Fidelity. Employees can have funds deposited through payroll deductions and withdraw them when necessary. It joined companies like Delta Air Lines, which began offering an emergency savings program through Fidelity in January 2023.
Employees who enroll in the Delta program open a cash management account with Fidelity. After completing the required financial coaching, they will receive a $750 deposit from Delta. The airline will then match up to $250 in employee contributions. As of last fall, 21,500 employees had participated, a Delta spokesman said.
Here are some questions and answers about emergency savings:
What is a reasonable goal for an emergency savings fund?
That depends on your financial situation. A common rule of thumb is to save at least three months of living expenses, but this can seem daunting for some people. Research shows that even smaller savings balances can help avoid resorting to risky alternatives like high-interest credit cards. America Saves, an initiative of the Consumer Federation of America, recommends aiming for $500 initially.
Is it better to save a lump sum for an emergency or rather save in small amounts?
Both options – or a combination of both – can work, depending on what is best for your situation. Tax time is here and many filers will receive a significant refund. The average federal refund was just under $3,200 last year, the Internal Revenue Service reported. Putting a portion of your refund into a savings account will help you set up your emergency fund.
Do I have to participate in a formal program to have money transferred from my paycheck to a savings account?
Probably not. Most employers offer electronic deposits and allow “split deposits,” where you automatically transfer a portion of your salary to a separate savings account. Check with your payroll department. Typically, you will need to fill out an application form with your bank account number. Alternatively, banks and credit unions, as well as many budgeting apps, offer automatic transfers from your checking account to a savings account.