Raising your rainy day fund could get a whole lot easier.
- The bill’s pension emergency fund would allow taxable carryovers directly from your paycheck.
- Employer matching would be permitted, but contributions could not exceed $2,500 per year.
- Distributions would be less restrictive than qualified pension plans.
The Emergency Savings Act of 2022 was introduced in May by Senators Cory Booker (D-NJ) and Todd Young (R-IN). It establishes what are called emergency pension funds, which will help employees save for emergencies through payroll deductions and improve their personal finances.
What is a pension emergency fund?
What’s in a name? Something misleading about emergency pension funds. Although emergency funds are linked to employer retirement plans, they are not limited to retirement plans. Instead, a pension-related emergency fund can be tied to a defined contribution plan, such as a 401(k).
At its most basic, a pension-related emergency fund is an emergency fund run like an employer-sponsored retirement plan. Funding the emergency fund is similar to funding a 401(k), with deferred contributions automatically deducted from one’s salary. Unlike a 401(k) contribution, an emergency fund contribution would not include any tax benefit, meaning any contribution is fully taxable as ordinary income. The bill contains a provision allowing automatic registration of up to 3% of earnings.
Once carried forward, they would be managed by the administrators of the pension plans. Because emergency funds are meant to withstand economic downturns, the legislation provides that contributions can be held in cash, interest-bearing accounts, or other capital-preserving investment products.
What about an employer match?
Employers looking to get involved could make matching contributions, according to the text of the bill. The matching contribution provision would operate the same as 401(k) matching, minus the tax benefits.
However, the bill also provides a limit on the amount that can be saved by both the employer and the employee. Combined account contributions cannot exceed $2,500, indexed annually for inflation. A $2,500 emergency fund pales in comparison to the expert-recommended rule of thumb of three to six months of spending.
Use our emergency fund calculator to see how your savings stack up.
How are distributions handled?
An emergency fund is only good if it is accessible. And according to the text of the legislation, an emergency pension-related fund will be much easier to access than a 401(k). The invoice allows withdrawals at the participant’s discretion. However, the bill requires plan sponsors to authorize withdrawals at least once a month. In addition, distributions must be made within one week of a withdrawal request.
What’s next for Bill?
Introduced in the Senate in May, the bill was read twice in the Senate and referred to the Finance Committee. The bill’s bipartisan sponsorship bodes well for a divided Congress. It’s unclear if the bill will make it through the Senate in its current form, or when it will pass. For now, the bill still has a long way to go before it becomes law, including its passage through the Senate, the House and its signature by the President.
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