Yet, while employers may be able to offer high yield savings accounts, in some circumstances they may not be the best choice for employees for many reasons.
Savings accounts, especially emergency accounts, are at the top of the list of basic items of financial wellness for most plan sponsors. Yet, savings accounts have hit a few snags lately. First, employee savings accounts may affect testing results. Second, employees may not know the pros and cons of specific types of savings accounts. Third, new rules allowing for incentives on participation may not extend to savings accounts.
Earlier this year, we discussed how plan sponsors can help their employees learn skills for retirement savings by encouraging early enrollment in savings accounts. Back in July of 2024, we noted that emergency savings accounts were becoming a hot topic among employees. “ News reports from 2023 noted that for the first time in four years ‘saving for retirement is not the primary financial stress factor for employees.’ And some provisions of the SECURE 2.0 Act make it easier for employers to create those accounts. Out of plan emergency accounts can be offered to interns and part-time workers. In some circumstances, this may include those that have an employer match. While out of plan emergency savings accounts may not have the tax advantages that their in-plan versions have, they don't require ERISA compliance.”[1]
The ease of creating employee savings accounts brought by the SECURE 2.0 Act and the growing interest in them seems like a setup for a home run. But before a sponsor swings for the fences, it’s worth noting how employees are enrolled in savings account matters. As we said back in2023, “When it comes to auto-enrolling in savings accounts, sponsors may be concerned with other regulations, specifically, those involving testing.”[2] By way of refresher, emergency savings accounts can affect plan testing because they are treated as Roth accounts, which are subject to the Actual Deferral Percentage (ADP) test.[3]
Back then, we discussed the DOL’s request for comment on new regulations around auto-enrollment. Specifically, the DOL sought comment on how SECURE 2.0 impacted plan administrators as to the guidance they needed for implementation of those sections. The agency established a timeline for gathering comments and considering them before making a public rule. However, those timelines have passed and the item remains on the DOL’s proposed rulemaking list. Sponsors may continue to have lingering questions concerning auto-enrollment and testing, a topic they should discuss with compliance counsel.
Some of the enthusiasm for savings accounts among employees may be due to high interest rates on high yield accounts which are traditionally much higher than average savings accounts. As U.S. News & World Report stated in early October of 2024, “In September 2024, the average interest rate for a savings account in the U.S. stood at 0.46%, according to the Federal Deposit Insurance Corp. By comparison, interest rates for some high-yield savings accounts exceed 4.50%.”[4]
Some payroll processors and benefits providers now include a variety of savings account options for plan sponsors, making it easier for plan sponsors to offer those accounts as part of payroll deductions for employees. Yet, while employers may be able to offer high yield savings accounts, in some circumstances they may not be the best choice for employees for many reasons. First, almost all high yield savings accounts are located at online banks and may not come with an ATM card. That might make them a poor choice for emergency accounts, if employees need to access cash in a hurry, such as a natural disaster. Second, withdrawals may be limited in some high yield accounts. Finally, the interest rate offered may be variable, not fixed, making it hard to plan for specific savings.
However, plan sponsors can use the interest generated by the high savings account rates to educate employees on the benefits of traditional savings accounts. It’s worth noting that while the SECURE 2.0 Act did provide a change in the rules to allow sponsors to provide de minimis incentives (such as gift cards) to new enrollees in 401(k) (and 403(b)) plans, those sections of the SECURE 2.0 Act specifically only mention 401(k) plans, not other retirement savings plans.[5] Therefore, sponsors may want to discuss with compliance counsel before opting to offer employees an incentive for enrolling in employee savings plans.
[1] https://www.bcgbenefits.com/blog/benefits-beyond-the-plan
[2] https://www.bcgbenefits.com/blog/emergency-savings-accounts
[3] https://www.bcgbenefits.com/blog/auto-enrolling
[4] https://www.usnews.com/banking/articles/what-is-a-good-interest-rate-on-a-savings-account
[5] https://www.irs.gov/pub/irs-drop/n-24-02.pdf
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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