To save for retirement, workers need an emergency savings solution

What do you want to know

  • S. 4353 is known as the Rise & Shine Act Bill.
  • The Emergency Savings Act section could add voluntary savings funds to defined contribution plans.
  • Workers could use after-tax Roth-style contributions to build up to $2,500 in account value.
  • Workers could withdraw the money without including the distributions in taxable income.

If we’ve learned anything from the past two years, it’s to expect the unexpected.

For retirement savers, this has been a challenge, especially with great difficulty balancing day-to-day expenses, retirement savings and debt.

The right emergency savings package could be a valuable benefit for workers, and recent legislative proposals aim to meet this challenge.

Helping emergency savings become more accessible

Workers and retirees are chronically undersaved, especially for short-term expenses and emergencies. According to several studies, less than 4 in 10 Americans have saved enough to cover an unexpected expense of $1,000.

With debt balances in the United States now at $1.7 trillion (around $5.2 trillion per person more than in 2019), low- and middle-income workers in particular are feeling the pinch. from increased daily expenses, increased debt and savings for retirement. .

There is nothing extravagant in their plans for the future. In fact, many workers today say they simply hope to maintain their current standard of living in retirement, with only 40% saying they are confident they have enough savings to live comfortably. according to a recent study Main research.

One solution: emergency savings funds

It is not only workers who are concerned about these issues, policy makers are also concerned.

At the end of March, as Secure 2.0 was being passed in the Housethe Senate Committee on Health, Education, Labor and Pensions also held a hearing on similar retirement-related topics.

Rely on the provisions of the Law of climb, Secure 2.0and the Security and Retirement Savings Act, the new proposed Rise & Shine Actor S. 4353, focuses on creating additional protections for workers and savers at all stages of retirement.

Approved in mid-June by the Senate HELP Committee, the Rise & Shine Act would enact a number of improvements to the retirement system, including a provision that would allow employers to offer after-tax emergency savings accounts in which employees could be automatically enrolled to fund emergency expenses.

Dive deeper, check out the “emergency savings sidecar” of the Rise & Shine Act:

  • A new optional benefits offer for employers, emergency savings accounts could only be offered in combination with a defined contribution retirement savings plan (hence the nickname “side account”).
  • Employers could choose to automatically enroll employees in the emergency savings account up to a maximum of 3% of an employee’s salary, and accounts are capped at $2,500 (or less, as defined by the employer).
  • Contributions to emergency savings accounts are made after tax and treated as voluntary deferrals for retirement matching purposes. Matching contributions are made to the defined contribution pension plan.
  • Once the cap is reached, if there is an excess of emergency savings contributions, those funds would flow into the worker’s retirement account. (For example, if a worker contributes more than $2,500, funds above that threshold would be diverted to the worker’s retirement savings account.)

Employers could also contribute to emergency savings accounts (separate from matching contributions). Withdrawals could be limited, but not less than once a month.

Important to note: Unlike retirement savings plans, no early withdrawal penalty would apply to withdrawals from these side accounts.

The bad news: administrative headaches

The Rise & Shine Act states that all contributions to accounts must be combined with the defined contribution retirement savings plan for the application of annual contribution and addition limits, and non-discrimination and the most stringent tests. heavy.

This is a potential headache for many.

The Alternative to the Senate Finance Committee

Shortly after the work of the HELP Committee, the Senate Finance Committee unanimously passed its own retirement bill: the Enhancing American Retirement Now, or EARN Act.

This legislation also deals with emergency savings, but rather than establishing a separate savings account, the EARN Act would allow annual withdrawals without penalty (up to a maximum of $1,000 from defined contribution plans) and the ability to make withdrawals for any reason. .

While this idea seems less complicated than the sidecar option, it comes with its own set of concerns and administrative issues.