The SECURE 2.0 Act of 2022 introduced the option for sponsors of §401(k), §403(b), or government §457(b) defined contribution plans to incorporate a Pension-Linked Emergency Savings Account (PLESA) feature. Notice 2024-22 from the IRS delivers preliminary guidance concerning the anti-abuse rules applicable to these plans.

In IRS News Release IR-2024-11, released at the same time as the Notice, the IRS provides a brief summary of the reasons for the notice:

Guidance on reasonable measures employers who offer PLESAs can take to discourage potential manipulation of the PLESA matching contribution rules can be found in Notice 2024-22, posted today on IRS.gov. The notice also requests public comment and explains how to submit comments.

Pension-Linked Emergency Savings Accounts (PLESAs)

The news release offers the following fundamental overview of the operation of a PLESA (Pension-Linked Emergency Savings Account):

Authorized under the SECURE 2.0 Act of 2022, PLESAs are individual accounts in defined contribution plans and are designed to permit and encourage employees to save for financial emergencies.

Employers can offer PLESAs in plan years beginning after Dec. 31, 2023. This means that, in some cases, eligible employees could have begun contributing to a PLESA as early as Jan. 1, 2024. Subject to certain restrictions, matching contributions are made with respect to PLESA contributions at the same rate as contributions to the linked defined contribution plan.

Employees who are eligible to participate in an employer's defined contribution plan and qualify to contribute to a PLESA, if their employer offers one, may contribute to the PLESA even if they don't participate in the employer's defined contribution plan. In general, the maximum balance in a participant's PLESA (attributable to contributions) is $2,500, though employers can choose to set a lower limit.

PLESAs are treated as designated Roth accounts. This means that contributions are not tax deductible, but withdrawals are generally tax free. Participants can withdraw funds held in the PLESA at least once a month, as necessary.

Limited Nature of Guidance in the Notice

The Notice is not intended to offer comprehensive guidance on all aspects of PLESAs (Pension-Linked Emergency Savings Accounts). Instead, its scope is confined to clarifying that specific actions are prohibited when adopting measures beyond those expressly permitted in the newly added sections of the Internal Revenue Code (IRC). The measures (both statutory and those additional ones a sponsor way wish to add) are ones designed to prevent potential abuse of matching contributions by employees under this program. As stated in Section I of the Notice:

This notice is not intended to provide comprehensive guidance with respect to section 127 of the SECURE 2.0 Act, but rather it provides initial guidance regarding anti-abuse rules under section 402A(e)(12) of the Internal Revenue Code (Code) to assist in the implementation of SECURE 2.0 Act section 127 provisions. This notice also addresses whether Rev. Rul. 74-55, 1974-1 C.B. 89, and Rev. Rul. 74-56, 1974-1 C.B. 90, are applicable to PLESAs.

The legislation acknowledges concerns that sponsors may have regarding employees potentially using PLESA contributions merely to gain matching contributions, without intending to retain the funds in the plan. There is apprehension that employees might plan to make contributions with the intention of requesting an “emergency” withdrawal, irrespective of whether an unexpected financial issue arises or not. Section II of the Notice outlines these provisions of the law as follows:

Section 402A(e)(12)(A) provides that a plan of which a PLESA is a part may employ reasonable procedures to limit the frequency or amount of matching contributions with respect to contributions to such account, solely to the extent necessary to prevent manipulation of the rules of the plan to cause matching contributions to exceed the intended amounts or frequency. Section 402A(e)(12)(B) provides that a plan of which a PLESA is a part is not required to suspend matching contributions following any participant withdrawal of contributions, including elective deferrals and employee contributions, whether or not matched and whether or not made pursuant to an automatic contribution arrangement.

Section II further notes that the IRS was obligated to issue guidance no later than 12 months following the enactment of the SECURE 2.0 Act of 2022 (although they missed that target by just over two weeks):

The last sentence of section 402A(e)(12) provides that the Secretary of the Treasury, in consultation with the Secretary of Labor, shall issue regulations or other guidance not later than 12 months after the date of the enactment of the SECURE 2.0 Act with respect to the anti-abuse rules described in section 402A(e)(12).

IRS Guidance Provided - Statutory Provisions Permitted to Control Matching Contributions

In Section III.A, the IRS commences by reminding taxpayers of the statutory provisions deemed automatically reasonable for controlling employee manipulation of matching amounts in cases where a PLESA provision is present in an eligible plan.

Statutory provisions under section 402A(e) that limit manipulation of the rules of the plan to cause matching contributions to exceed the intended amounts or frequency include:

Order of matching contributions: Section 402A(e)(6)(B) provides that any matching contributions made under the plan are treated first as 5 attributable to a participant's elective deferrals other than PLESA contributions. As a result, any elective deferrals a participant makes under the underlying defined contribution plan will be matched first and will lower the availability of matching contributions that will be made on account of participant contributions to their PLESA;
Limitation on annual matching contributions: Section 402A(e)(6)(A) provides that matching contributions on account of contributions to the PLESA cannot exceed the maximum account balance set under section 402A(e)(3)(A) ($2,500 (as adjusted by the Secretary of the Treasury)) or a lower amount set by the plan sponsor) for the plan year. Section 402A(e)(3)(A)(ii) also permits a plan sponsor to set a lower PLESA balance limit than the $2,500 limit under section 402A(e)(3)(A)(i). A lower limit on the portion of the PLESA balance attributable to participant contributions would result in a correspondingly lower cap on annual matching contributions that would be required under section 402A(e)(6)(A).

Section III.A goes on to state that a sponsor may regard these tools as sufficient for mitigating the risk of employees manipulating rules to obtain additional matching contributions.

A plan sponsor might view these provisions as sufficient anti-abuse provisions, and therefore decide not to impose any other restrictions meant to prevent manipulation of matching contributions. In such a case, for example, a plan sponsor may consider a participant as not manipulating the matching contribution rules if the participant made a $2,500 contribution in one year, received the matching contribution on such amount, and then took $2,500 in distributions that year and repeated that pattern in subsequent years.

Similarly, because plans are not required to permit participants to take more than one distribution per month, plan sponsors may view the option of limiting the number of permissible withdrawals to a maximum of once per month as a sufficient constraint on the potential to manipulate the matching contribution rules.

This discussion implies a reminder to sponsors that by limiting their provisions to curb abuse of the matching contribution rules, they can avoid concerns about IRS challenges. The law does allow for other measures to be implemented. The opening paragraph of Section III.B. details the legal provisions in this context:

Under section 402A(e)(12)(A), a plan of which a PLESA is a part may, but is not required to, employ reasonable procedures to limit the frequency or amount of matching contributions with respect to contributions to a PLESA. However, plan sponsors might be concerned that a participant could nevertheless contribute to the participant's PLESA and take distributions in a way that maximizes matching contributions received but maintains little to no contributions in the PLESA. If a plan sponsor decides to employ additional procedures to prevent abuse, section 402A(e)(12)(A) provides that reasonable procedures are permitted solely to the extent necessary to prevent manipulation of the rules of the plan to cause matching contributions to exceed the intended amounts or frequency.

IRS Guidance to Limit Manipulation of Matching Contributions

Section III.B. of the Notice contains guidance from the IRS on provisions deemed unacceptable for limiting the manipulation of matching contributions.

A reasonable anti-abuse procedure is one that balances the interests of participants in using the PLESA for its intended purpose with the interests of plan sponsors in preventing manipulation of the plan's matching contribution rules. Plan sponsors may find it challenging to identify participants engaging in manipulative practices because those participants may be able to adapt their pattern of contributions and distributions to replicate patterns of participants making contributions and taking periodic distributions for legitimate purposes, such as unexpected expenses. The Treasury Department and IRS have determined that procedures that are unreasonable for a plan sponsor to implement include, but are not limited to:

Forfeiture of matching contributions: A plan may not provide that matching contributions already made on account of participant contributions to the PLESA will be forfeited by reason of a participant’s withdrawal from a PLESA;

Suspension of participant contributions to PLESA: A plan may not suspend a participant's ability to contribute to the participant's PLESA on account of a withdrawal from the PLESA; and
Suspension of matching contributions on participant contributions to the underlying defined contribution plan: A plan may not suspend matching contributions made on account of participant elective deferrals to the underlying defined contribution plan.

Revnue Rulings 74-55 and 74-56 Do Not Apply to PLESAs

Section IV addresses concerns raised by some commentators about the applicability of Revenue Rulings 74-55 and 74-56 in this area. The IRS concludes that neither ruling is applicable to PLESAs.

Certain stakeholders have expressed concerns regarding the application of Rev. Rul. 74-55 and Rev. Rul. 74-56 to PLESAs. The Treasury Department and the IRS do not view these revenue rulings as applicable in the context of PLESAs, regardless of whether the contributions are matched. The Treasury Department and the IRS invite comments regarding the applicability of these revenue rulings, and the regulations on which they are based, in this or other contexts.