ESAs Contribute to Financial Security

Having access to liquid assets is an important element in a family’s financial security. Unfortunately, many Americans are unprepared for even modest financial problems and relatively small, unexpected expenses can be a real hardship for them. The pandemic has underscored the importance of having a financial cushion in difficult times. In response, employers are introducing programs that encourage workers to set aside cash automatically through payroll deductions that are deposited into emergency savings accounts (ESAs). The primary benefits of ESAs include decreased DC plan leakage in the form of hardship withdraws — employees are not dipping into retirement savings for emergencies — and an improved ability to attract and retain employees.

of American households could not come up with $400 to meet an emergency[1]
of middle-income households say they do not have funds available to cover expenses for three months[2]
of Americans say they would be likely to participate in a payroll-deduction rainy day savings program if their employer offered one[3]

What You Should Know

ESAs are funded in a manner similar to 401(k) contributions. With ESAs, however, the funds deducted from an employee’s paycheck are taxed as ordinary income and are available when the employee has an immediate financial need.

According to a survey by AARP[3]:

  • An employer match makes the vast majority of employees (87%) more likely to save.
  • Most employees (60%) would prefer that the match be deposited into the emergency savings account rather than into a existing savings account.
  • The ability to direct payroll contributions to an existing account makes half of employees more likely to participate.
  • Employees are least willing to compromise on the ability to access their money immediately, start or stop contributing, keep the account if they leave their job, and maintain privacy.

Recordkeepers can help plan sponsors offer liquid emergency savings solutions either in-plan (plan participants make voluntary after-tax plan contributions to accounts within 401(k) plans) or out-of-plan (employees can direct a portion of their pay to emergency savings fund accounts at an outside financial institution).

For out-of-plan ESAs, policy guidance secured from the Consumer Finance Protection Bureau (CFPB) enables employers to overcome a longstanding federal rule that had acted as a barrier to implementing automatic enrollment in emergency savings programs. A template now makes it easier for employers to apply for approval from the CFPB to add an Autosave program that is similar to auto-enrollment for DC accounts.

Providers can help plan sponsors educate employees on the importance of establishing emergency savings by offering resources like targeted educational materials and live seminars.

Employers considering ESAs should asses:

  • If the ESA is to be offered in-plan or out-of-plan.
  • Whether they want to set the ESA up to work through auto-enrollment.
  • If employer contributions will be included and, if so, will they continue after an ESA reaches a certain threshold.
  • Whether contributions may spill over into other types of contributions or investment vehicles after accounts reach a certain savings level.
  • The possible impact of ESAs on existing DC plan accounts.
  • The capabilities of a vendor to meet operational needs.

Employee Savings Account Vendors

*PNC does not endorse third party vendors. Information about third party vendors is provided for informational purposes only. Such information is not guaranteed to be accurate or complete.

Commonwealth / Voya Financial (in-plan)
  • Commonwealth collaborated with Voya Financial to develop an emergency savings solution as part of the BlackRock Savings Initiative.
  • UPS was the first employer in the Initiative to roll out an emergency savings program at scale.
  • The UPS program allows non-unionized US workers to contribute in a 401(k) account to a linked emergency-savings option within the account using after-tax payroll deductions.
  • Eligible employees may elect to contribute up to 5% of pay to the emergency account and can invest the money in the same options the 401(k) offers. No match is currently offered for money put into the ESA.
  • Withdrawals are tax-free. Earnings on after-tax contributions are subject to income tax and, a 10% penalty if the employee is under age 59 1/2. The penalty can be avoided by rolling the earnings into an IRA.

Prudential / Prosperity Now (in-plan)

  • An after-tax solution is offered in partnership with the nonprofit Prosperity Now.
  • Only the earnings are taxed (and penalized if the participant is under age 59 ½) on withdrawal due to the after-tax structure of the product.
  • Employees can automate contributions to the after-tax portion of their 401(k) account by deducting as little as 1% from their paycheck each pay period.
  • An employee may change the contribution rate and start/stop contributions through an online portal and mobile app.
  • Employers can match the after-tax portion with no additional fee to either the plan sponsor or participant.
MassMutual / Millennium Trust (out-of-plan)
  • MassMutual partners with Millennium Trust to offer an FDIC-insured ESA.
  • The ESA is held by Millennium Trust and is available through MassMutual’s MapMyFinances financial wellness tool.
  • The plan is available to MassMutual’s retirement plan savers.
  • Account holders are required to make a minimum deposit of $25 per month; there is a maximum balance of $250,000.
John Hancock / Fintech App (out-of-plan)
  • John Hancock makes its standalone ESA available through its participant website.
  • Plan participants can access their account and set up recurring deposits from their checking account through the participant site.
  • Participants are automatically enrolled in a cash account for free; an advisory fee is charge if an employee chooses a managed account ESA.
  • Using an app, a participant can set a savings goal, monitor progress, and transfer funds to their checking account for free.

Businessolver (out-of-plan)

  • Goal Accounts (GAs) are managed within the Benefitsolver® employee benefits platform.
  • They automatically deduct funds after an employee establishes a GA from the employee’s paycheck (after taxes) and deposits them into an account in an amount specified by the employee.
  • Funds are available any time without penalty via a debit card or electronic transfer.
  • Employees can establish a GA as part of their benefits enrollment process since the accounts are integrated with Benefitsolver.
  • The Goal Account is not an IRS qualified account: It is an automatic program that allows employees to have money automatically set aside from their paycheck and placed in an account.