The Emergency Savings Account Hiding Inside the 401(k) Plan

Almost nobody is using it. Here is why that is a missed opportunity, and why I think the logic behind it is sound even if the execution is clumsy.

Photo by Jess Barnett on Unsplash

The SECURE 2.0 Act created a new plan feature called a Pension-Linked Emergency Savings Account, or PLESA. It’s been available since the 2024 plan year. Adoption has been close to nonexistent. I want to walk through what a PLESA actually is, the rules that govern it, why almost no plan sponsor has added one, and then make the case for why emergency savings belongs in the retirement planning conversation regardless of which vehicle a business chooses.

How SECURE 2.0 Created the PLESA

The SECURE 2.0 Act of 2022 was enacted December 29, 2022, as Division T of the Consolidated Appropriations Act, 2023. Section 127 of that law created the PLESA. The governing rules sit in new sections 801 through 804 of ERISA, with parallel provisions in section 402A(e) of the Internal Revenue Code. The feature became effective for plan years beginning after December 31, 2023.¹

In January 2024, the DOL issued a set of 20 FAQs covering administration of PLESAs, and the IRS issued Notice 2024-22 addressing the anti-abuse rules tied to the employer match.² Both sets of guidance can be relied on now. More guidance was promised. As of this writing, the substantive picture hasn’t changed much.

This was an optional provision. SECURE 2.0 made it available to sponsors of 401(k), 403(b), and governmental 457(b) plans. No sponsor is required to add it, and a sponsor that adds it can terminate it at any time without violating the anti-cutback rules under IRC § 411(d)(6).³

What a PLESA Actually Is

A PLESA is a short-term Roth savings account that lives inside a defined contribution plan and is designed to be tapped for emergencies without the usual penalties or friction that come with raiding a retirement account.

The mechanics:

1. Who can participate. Only non-highly compensated employees. An eligible participant must meet the plan’s age and service requirements and must not be an HCE. A participant who later becomes an HCE keeps the account and can keep withdrawing from it, but can no longer contribute.

2. Contributions. Roth (after-tax) only. The account balance is capped at $2,500, indexed, or a lower amount the sponsor selects. Employer contributions are not permitted into the PLESA itself. PLESA contributions count toward the IRC § 402(g) elective deferral limit, which is $24,500 for 2026.

3. The match. Here is the part sponsors should read twice. If the plan provides a match on regular elective deferrals, the sponsor must also match PLESA contributions at the same rate. That match does not go into the PLESA. It goes into the regular plan account and follows normal distribution and tax rules. SECURE 2.0 required the IRS to write anti-abuse rules because, without them, a participant could contribute to the PLESA, collect the match, withdraw the contribution, and repeat. Notice 2024-22 addresses this. Matching contributions are treated as first attributable to elective deferrals outside the PLESA, and the total match attributable to PLESA contributions is capped at the account balance limit.

4. Withdrawals. The participant can withdraw all or part of the account at their own discretion, at least monthly, with no requirement to prove a hardship and no 10% early distribution penalty. Because it is a Roth account, withdrawals of contributions and earnings come out tax-free. The first four withdrawals in a plan year cannot be subject to fees. Reasonable fees are permitted after that.

5. No minimums. A plan cannot require a minimum amount to open a PLESA, cannot impose a minimum balance, and cannot close or liquidate the account for dropping below a threshold. The DOL was explicit on this point.

6. Auto-enrollment. A sponsor can automatically enroll eligible employees at up to 3% of compensation. Employees must receive a notice 30 to 90 days before the first contribution, and annually after that. They can opt out and withdraw at no charge.

7. Investments. Contributions must be held in cash, an interest-bearing account, or a capital-preservation product that provides a reasonable rate of return consistent with liquidity. Products with surrender charges or liquidity constraints are generally incompatible with the statute’s purpose.

8. Recordkeeping. PLESAs require separate accounting from the rest of the plan. There is a Form 5500 plan characteristic code for plans with a PLESA feature.⁴

That’s the design. On paper it is a reasonable answer to a real problem. In practice, it hasn’t been adopted.

Almost No One Has Adopted It

This isn’t a soft observation. The data is fairly stark.

Vanguard’s analysis of its administered plans through year-end 2025 found that PLESAs have “generated minimal to no interest from plan sponsors,” and grouped them with Roth employer contributions as the optional SECURE 2.0 features going nowhere. Vanguard’s broader read was that sponsors are prioritizing provisions that support long-term retirement savings and taking a selective approach to short-term liquidity features. For contrast, 91% of Vanguard-administered plans adopted the enhanced age 60 to 63 catch-up limit by the end of 2025. The PLESA did not get that treatment.⁵

The Plan Sponsor Council of America’s 68th Annual 401(k) Survey shows the same thing. Among plans with 1 to 49 participants, 79.8% said they were not even considering adding a PLESA, and only about 3% had one. That number rises to roughly 90% not considering it for plans with 1,000 to 4,999 participants and 89.2% for plans with 5,000 or more. A separate PSCA poll found that not a single sponsor in the sample was offering a PLESA, though 13% said they were considering it. One sponsor’s recorded response was that they “do not wish to function as a bank.” Another called it an administrative nightmare. That’s the candid version of where the market is.⁶

The Bipartisan Policy Center and Commonwealth, working through BlackRock’s Emergency Savings Initiative, reached the same conclusion: some sponsors have expressed interest, but most recordkeepers and plan sponsors are hesitant to move forward without legislative and regulatory changes.⁷

There’s one counterintuitive wrinkle worth noting. The little interest that exists is concentrated in smaller plans, which is the opposite of what you would expect for an administratively complex feature. I won’t over-read a 3% adoption rate, but it’s a data point.

Recordkeepers Are Still Building (Or Choosing Not To)

The adoption problem isn’t purely a demand problem. The supply side is part of the story.

Recordkeepers have been slow to build PLESA functionality because the operational lift is real and the demand signal has been weak. The dynamic is circular. The SPARK Institute, the recordkeeper trade body, has said adoption has been tempered by operational complexity and that more guidance is needed before PLESAs can be widely implemented.⁸ One law firm’s plain-language summary: because the number of sponsors considering PLESAs has been low, recordkeepers have been reluctant to spend the money to reprogram their systems, and even sponsors who want to lead on this have faced pushback and delays from their recordkeepers.⁹

Industry consultants have described the same standoff. Recordkeepers are not eager to invest in supporting these accounts without significant sponsor interest, and many recordkeepers that already offer an out-of-plan emergency savings product have little incentive to build the in-plan version that competes with it.¹⁰

The friction points recordkeepers keep flagging:

• The HCE exclusion. An employee’s HCE status can change year to year, and tracking who is in and who is out is cumbersome and costly to administer.

• The $2,500 cap is a balance limit, not an annual contribution limit. A contribution limit would be far easier to administer.

• The fee-free withdrawal requirement for the first four withdrawals raises the question of who absorbs that cost.

There’s pending legislation aimed squarely at this. The Emergency Savings Enhancement Act of 2025, introduced by Senators Booker and Young with House companions, would raise the cap from $2,500 to $5,000 and eliminate the HCE exclusion. The explicit goal is to reduce administrative complexity and spur adoption.¹¹ Whether it passes is an open question. I mention it because the people closest to this feature have effectively conceded the current design is too clunky to take off on its own.

Why This Matters: Americans Cannot Absorb a Financial Shock

Set the PLESA aside for a moment and look at the underlying problem it was built to solve.

The Federal Reserve’s 2025 Survey of Household Economics and Decisionmaking, released in May 2026, found that 63% of adults said they could cover a hypothetical $400 emergency expense using cash or its equivalent. That number has been flat at 63% across 2024 and 2025, down from a high of 68% in 2021. Put the other way, more than a third of American adults couldn’t cover a $400 surprise without borrowing or selling something.¹²

It gets tighter at the bottom. In the Fed’s 2024 data, 18% of adults said the largest emergency expense they could handle using only savings was under $100. Only 55% of adults said they had set aside enough for three months of expenses, and 30% indicated they could not cover three months of expenses by any means.¹³

The private data tells the same story from a different angle. PwC’s 2026 Employee Financial Wellness Survey found that more than half of employees (53%) have less than $5,000 saved for emergencies, and 30% have less than $1,000. To bridge the gap, 44% use credit cards for necessities and 39% have used payday loans or advances.¹⁴

These aren’t numbers about poverty. They are numbers about the median working household. A car transmission, an emergency room copay, a furnace, a security deposit after a move. Any of these clears the threshold of what a third of households can absorb.

When People Cannot Absorb a Shock, They Raid the 401(k)

This is the part that connects directly to retirement planning, and it’s where the actuary in me pays attention.

When a worker has no liquid cushion and an emergency hits, the retirement plan becomes the cushion. The data on plan leakage has been moving in one direction for years.

Vanguard’s How America Saves 2026 report found that 6% of participants took a hardship withdrawal in 2025, a record high. That is up from 4.8% in 2024 and 3.6% in 2023, against a pre-pandemic baseline of about 2%. It was the sixth consecutive annual increase.¹⁵ The median hardship withdrawal was about $1,900. The top reasons: avoiding foreclosure or eviction (36%), medical expenses (31%), and tuition (13%).¹⁶ Note the size. A $1,900 median withdrawal is exactly the kind of expense a modest emergency fund is designed to absorb. People are reaching into a retirement account to solve a problem a $2,500 sidecar account was built for.

The other half of leakage is the contribution side. When money is tight, the retirement deferral is one of the first things to get cut, because it is discretionary and the participant controls it directly. Plans let participants pause or reduce contributions at any time, and under financial pressure that is a rational short-term move with an expensive long-term cost. A single year of a missed average employer match, compounded over 30 years at 7%, runs into the tens of thousands of dollars in lost balance. The participant rarely sees that tradeoff at the moment they make it.

So the absence of an emergency fund hits retirement security from two sides at once. It pulls money out through hardship withdrawals and loans, and it chokes off contributions going in. Both happen precisely when the participant is least able to recover from them.

There’s evidence the reverse is also true. One emergency savings provider reports that 92% of its users at least maintained their retirement contribution rate over the year, with 32% voluntarily increasing it, roughly double the national average.¹⁷ BlackRock’s research on sidecar accounts makes a related point: the presence of an accessible cushion gives people enough sense of control that they are more comfortable committing to long-term saving.¹⁸ The cushion does not compete with retirement savings. It protects it.

Emergency Savings Is Part of Retirement Planning

Here’s the conclusion I want plan sponsors, TPAs, advisors, and CPAs to sit with.

An emergency fund is not separate from retirement planning. It is the structural support underneath it. A retirement plan without an emergency cushion behind it is a plan that gets drained and starved every time the household hits a bump, and the data says households hit bumps constantly.

This is why pairing a 401(k) with an emergency savings mechanism makes sense, whether that mechanism is a PLESA, an out-of-plan emergency savings account through a third-party provider, or simply a deliberate financial wellness program that gets people to a starter cushion before pushing them to maximize deferrals. The PLESA is one tool. It happens to be a clunky one right now. But the principle behind it is correct, and the principle does not depend on the tool.

“It Is Not the Business’s Responsibility”

I hear this from owners, and I understand the instinct. A business isn’t a bank. Helping employees save for a flat tire isn’t, on its face, a core function of running a company.

I would reframe it. This isn’t about responsibility. It’s about output.

The PwC 2026 survey found 59% of employees are stressed about their finances right now, and 59% say that stress is negatively affecting their workplace productivity. Financially stressed employees are several times more likely to be distracted at work and report spending multiple hours of work time each week dealing with money problems.¹⁹ Other surveys put the lost-productivity figure around seven hours per week per stressed employee and tie financial stress to higher absenteeism and turnover.²⁰

An employee dealing with a financial emergency is not bringing their full attention to your business. They are on the phone with a creditor, calculating which bill to skip, and updating their resume because a job that pays $3 more an hour suddenly matters. That cost lands on the employer whether or not the employer ever offered an emergency savings benefit. The only question is whether the business does anything about it.

A financially secure workforce is a more focused, more present, more loyal workforce. That is not a soft benefit. It shows up in retention, in error rates, in the number of people who are mentally at work while they are physically at work. The businesses that treat financial security as part of the compensation and benefits architecture, rather than as the employee’s private problem, are the ones that get the better version of their workforce.

The Takeaway

The PLESA is a good idea with an awkward implementation. Adoption is near zero, recordkeepers are mostly still on the sidelines, and pending legislation is trying to fix the design. If you are a plan sponsor, I am not going to tell you to rush out and add a PLESA tomorrow. The current rules make it harder than it should be.

But don’t let the clumsiness of this one vehicle obscure the underlying point. More than a third of American workers can’t absorb a $400 surprise. When the surprise comes, they pull money out of their retirement plan or stop funding it, usually at the worst possible time. Emergency savings and retirement security are the same conversation. If you sponsor a plan, advise on one, or run a business with a plan, the emergency cushion belongs on the agenda right next to the deferral rate.

If you want to think through how emergency savings, leakage, and plan design interact for a specific plan, that is a conversation I’m always happy to have.

1. U.S. Department of Labor, “FAQs: Pension-Linked Emergency Savings Accounts.” https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/pension-linked-emergency-savings-accounts

2. Mercer, “DOL, IRS issue guidance on DC plan emergency savings accounts.” https://www.mercer.com/insights/law-and-policy/dol-irs-issue-guidance-on-dc-plan-emergency-savings-accounts/

3. Reinhart Boerner Van Deuren, “Pension-Linked Emergency Savings Accounts—An Overview for Plan Sponsors.” https://www.reinhartlaw.com/news-insights/pension-linked-emergency-savings-accounts-an-overview-for-plan-sponsors

4. Morgan Lewis, “SECURE Act 2.0: DOL and IRS Issue Coordinated Guidance on PLESAs.” https://www.morganlewis.com/pubs/2024/06/secure-act-2-0-dol-and-irs-issue-coordinated-guidance-on-plesas

5. 401(k) Specialist, “SECURE 2.0 Adoption Trends: Plan Sponsors Lean Into Enhanced Catch-Up Contributions.” https://401kspecialistmag.com/secure-2-0-adoption-trends-plan-sponsors-lean-into-enhanced-catch-up-contributions/

6. Plan Sponsor Council of America, “What’s the Deal with PLESAs?” https://www.psca.org/news/psca-news/2025/11/whats-the-deal-with-plesas/

7. Bipartisan Policy Center, “Workplace Emergency Savings Policy: Where We Are and What Comes Next.” https://bipartisanpolicy.org/article/emergency-savings-policy/

8. PLANSPONSOR, “Where Does SECURE 2.0 Implementation Stand for 2025?” https://www.plansponsor.com/in-depth/where-does-secure-2-0-implementation-stand-for-2025/

9. Reinhart Boerner Van Deuren, “Pension-Linked Emergency Savings Accounts—An Overview for Plan Sponsors.” https://www.reinhartlaw.com/news-insights/pension-linked-emergency-savings-accounts-an-overview-for-plan-sponsors

10. PLANSPONSOR, “Will Plan Sponsors Adopt PLESAs in 2024?” https://www.plansponsor.com/will-plan-sponsors-adopt-plesas-in-2024/

11. BPC Action, “Fact Sheet: The Emergency Savings Enhancement Act of 2025.” https://bpcaction.org/fact-sheet-the-emergency-savings-enhancement-act-of-2025/

12. Board of Governors of the Federal Reserve System, press release on the Economic Well-Being of U.S. Households in 2025 report (May 13, 2026). https://www.federalreserve.gov/newsevents/pressreleases/other20260513a.htm

13. Board of Governors of the Federal Reserve System, “Report on the Economic Well-Being of U.S. Households in 2024 — Savings and Investments.” https://www.federalreserve.gov/publications/2025-economic-well-being-of-us-households-in-2024-savings-and-investments.htm

14. PwC, “2026 Employee Financial Wellness Survey.” https://www.pwc.com/us/en/services/consulting/business-transformation/library/employee-financial-wellness-survey.html

15. PLANSPONSOR, “Rise in Hardship Withdrawals Behind Increase in Retirement Plan ‘Leakage’.” https://www.plansponsor.com/rise-in-hardship-withdrawals-behind-increase-in-retirement-plan-leakage/

16. CNBC, “Retirement balances are up, but more workers took hardship withdrawals.” https://www.cnbc.com/2026/03/04/retirement-balances-hardship-withdrawals.html

17. SecureSave, “Build retirement security while reducing loans and withdrawals.” (Provider-published data.) https://www.securesave.com/use-cases/reduce-401-k-loans-withdrawals

18. BlackRock, “Emergency Savings = Better Retirement?” https://www.blackrock.com/us/financial-professionals/retirement/insights/does-emergency-savings-equal-better-retirement

19. PSHRA, “Report: Financial Stress is Negatively Affecting Employee Productivity” (summarizing PwC’s 2026 Employee Financial Wellness Survey). https://pshra.org/report-financial-stress-is-negatively-affecting-employee-productivity/

20. WebMD Health Services, “Financial Stress in the Workplace: Its Impact on Employees.” https://www.webmdhealthservices.com/blog/financial-stress-in-the-workplace-how-to-help-employees-cope/