According to Pew Research Center, fewer than one in four lower-income workers in the U.S. have enough extra funds to cover three months of expenses, let alone those that are unexpected. With that said, people who had emergency funds might’ve exhausted them by now to make ends meet during recent trying times. This lack of emergency funds can have an impact on people’s ability to take care of some of their most basic expenses. For example, 15% of adult renters were not caught up on rent as of March 2021, according to the Center on Budget and Policy Priorities (CBPP). Some employers are addressing these concerns by creating emergency savings plans—accounts that can be funded with automatic deposits through payroll deductions to help pay for critical costs like housing, food, and transportation. Here’s why these employer-sponsored emergency funds could be essential, and how your company may be able to assist you in times of need.
How an Employer-Sponsored Emergency Savings Plan Works
Employer-sponsored emergency savings plans exist in a few different forms, but they all serve the same purpose: Giving employees access to a liquid account when they need immediate cash. For instance, in October 2020, shipping company UPS partnered with financial nonprofit Commonwealth to introduce an emergency fund plan for its 90,000 non-union workers. This plan is similar to a retirement account, where employees contribute a percentage of their pay through payroll deductions. There are a few common employer-sponsored emergency savings plans that your company may offer. You could have an in-plan option, where your employer offers an account that supplements your retirement plan, but is used to help prevent you from dipping into your retirement savings early. Another option may be a separate program through a bank or credit union that allows you to save money.
After-tax employee 401(k) accounts: Employers and workers could make after-tax contributions to an emergency fund that’s administered by the same group that runs the company’s 401(k). While earnings are taxed and subject to penalties upon withdrawal, your after-tax contributions are not, making that money more liquid than your pre-tax 401(k) contributions. Deemed Roth IRAs under a 401(k) plan: This works similar to a 401(k) account but earnings are withdrawn tax-free because with Roth plans, you are contributing after-tax dollars, though earnings may still be subject to taxes and penalties. Depository institution accounts: Some companies may not offer retirement plans, but can encourage emergency savings through depository accounts—savings plans at banks or credit unions that are easily accessible and FDIC-insured.
If you were to leave the company, the type of account could determine how you get that money. For instance, money in a retirement 401(k) might get rolled over into an individual retirement account (IRA). On the other hand, with an employer-sponsored emergency savings account, money in a depository institution might mean you just need to transfer that money to a different account outside of what the company established. Some of the questions you may want to ask HR and plan sponsors include:
What’s the maximum threshold for savings? Is there a company match? Can you set up automatic payroll deductions?How do you access the money in the account?
You can also use the Compliance Assistance Statement of Terms (CAST) template provided by the Consumer Financial Protection Bureau (CFPB) for some general guidelines.
Pros and Cons of Employer-Sponsored Emergency Savings Plans
Pros Explained
Fast Funds, Less Penalties
Giving workers quick access to a savings or other type of easily accessible account can be crucial to their financial well-being. Savings accounts may help deter employees from tapping into retirement savings in times of need. Even if you did choose to withdraw funds early from your retirement plan to cover expenses, it may take several weeks for you to actually get that money and it could come with taxes and penalties that ultimately reduce the amount you receive. In times of an economic crisis or downturn, people need money right away without penalties.
Option for Companies Without Retirement Plans
Employers that don’t offer retirement plans can still offer emergency savings plans by opening accounts at banks or other financial institutions. This could give you quick access to funds without the red tape of a 401(k) or similar retirement plan.
Waived Fees and Charges
Some people may skip opening traditional savings accounts for fear of not meeting minimum saving or deposit requirements. An employer-sponsored savings plan may cover the fees and charges that you would otherwise have to pay.
Cons Explained
No Guarantee of Employer Matching Contributions
While workers contributing to their own savings plans are important, employers matching contributions means workers can double their deposits. These incentives could increase employee participation in plans they might not otherwise get involved in. However, while you might have the opportunity to contribute to a savings account through work, there’s still the chance that your employer doesn’t offer matching contributions.
Less Money for the Long Term
For low and moderate earners who are already struggling to save for retirement, putting money into an emergency savings plan could mean putting less money—or no money at all—into a retirement account. This already adds to the worrying fact that many Americans have less than $100,000 saved for retirement, according to a January 2020 survey by TD Ameritrade.
Additional Employer Expense
With new accounts comes new fees for employers. Small businesses or companies already running lean due to the pandemic might not be able to afford additional fees and expenses right now, or have the administrative bandwidth to execute. And that means your company may not be able to offer this option even if you pitch it to your HR department.
The Bottom Line
As the public health crisis and economic downturn significantly impacts many households, you may need more immediate financial assistance—especially through your employer. If you think an employer-sponsored emergency savings plan is right for your company, talk to your HR department and potential plan sponsors. They can look into implementing a plan and addressing the fiscal, logistical, and operational issues that come with it. In the process, you may be able to have managers and leadership teams gather thoughts and feedback from other employees via anonymous surveys and group or one-on-one meetings. If your company is able to offer this rainy-day option, it could potentially be pivotal to your financial stability.
