A look at SECURE 2.0's emergency savings provisions

It helps to have a rainy-day fund in times of economic uncertainty or when an unexpected issue arises at home.

With that in mind, lawmakers included several emergency savings provisions in a bipartisan retirement security package known as SECURE 2.0 that was signed into law in December as part of a year-end spending bill.

Notably, starting in 2024, SECURE 2.0 allows employers to offer participants an emergency savings account as part of their retirement plan. Participants can be automatically enrolled at up to 3% of their pay — with the ability to opt out — and after-tax contributions are capped at $2,500. Also, participants must be allowed to take at least one withdrawal per month, and the first four withdrawals per year cannot be subject to fees. The emergency savings account may be invested in cash, interest bearing deposit accounts and principal preservation accounts, and there is a fiduciary safe harbor for automatic enrollment.

Contributions to emergency savings accounts must be eligible for the same matching contributions that apply for elective deferrals, but the employer matching contributions are made to the retirement plan instead of the emergency savings account.

Another provision allows a participant to make one penalty-free withdrawal from their retirement account of up to $1,000 per year for "unforeseeable or immediate financial needs relating to personal or family emergency expenses." The withdrawal may be repaid within three years and only one withdrawal per three-year repayment period is permitted if the first withdrawal has not been repaid.

Timothy Flacke, co-founder and executive director at Commonwealth, a non-profit that aims to build financial security and opportunity for financially vulnerable people through innovation and partnerships, said the pandemic highlighted how crucial emergency savings are.

While it's important to think about long-term financial security, the thing that keeps most Americans up at night is what's going to happen next week, next month, or sometimes tomorrow, he said. "If you have more of a cushion than you're less likely to tap into something long term," Mr. Flacke added. "Our goals around retirement saving, hard as they already are as a society, are even harder when people aren't set up to manage the near-term crises."

Sen. Patty Murray, D-Wash., was chairwoman of the Senate Health, Education, Labor and Pensions Committee during the previous congressional session and a major proponent of SECURE 2.0's emergency savings provision.

"I've heard from so many people who had to raid savings meant for the future, not to mention countless others who have never had access to an employer-sponsored retirement plan," she said in a December statement. "That's why these reforms are so important."

According to data from Vanguard Group, 2.8% of the nearly 5 million defined contribution plan participants across its record-keeping business initiated a hardship withdrawal in 2022, up from 2.1% in 2021.

"Given that it's now easier to request a hardship withdrawal and that automatic enrollment is helping more workers save for retirement, especially lower-income workers, a modest increase is not surprising," Vanguard said in a Feb. 3 report. "And for a small subset of workers facing financial stress, hardship withdrawals may serve as a safety net that otherwise may not have been available without plan-implemented automatic solutions."

In 2018, Congress passed the Bipartisan Budget Act which in part eased restrictions on hardship withdrawals for retirement plan participants. The measure removed the requirement that participants who take hardship withdrawals cannot contribute to their retirement plans for six months, and it eliminated the requirement that participants must take a loan before taking a hardship withdrawal from their contributions to their accounts.

Mr. Flacke said SECURE 2.0's emergency provisions will help people better prepare for tough times so they don't have to dip into their long-term retirement accounts.

"Having even a modest cushion just makes people more resilient and more able to handle what is just the reality of the economy we live in," he said. "There's going to be a lot of ups and downs and smoothing those out lessen peoples' financial anxiety and gives them the ability to pursue their longer-term goals more effectively as well."