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Is an emergency savings account reachable by a QDRO?


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The SECURE 2.0 Act of 2022’s provisions for a “pension-linked emergency savings account” include not only Internal Revenue Code provisions but also a new part 8 of subtitle B of title I of the Employee Retirement Income Security Act of 1974.

Am I right in thinking an emergency savings account is a part of an ERISA-governed retirement plan (if it’s not a governmental plan or church plan), and so is governed by ERISA § 206(d)(3), with its QDRO exception from a retirement plan’s anti-alienation provision?

How does a need to pay an alternate payee as a qualified domestic relations order requires affect one’s administration of a retirement plan and its emergency savings account?

Is it the same as, or different from, administering QDROs regarding a plan’s other subaccounts?

If a participant has immediate access to an emergency savings account, would a spouse or other alternate payee get no less access?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Thank you for helping me open a discussion.

This emergency savings account doesn’t do much that couldn’t be handled with an employer’s payroll slot for voluntary wage deductions paid over to a bank or credit union account the employee specifies. (But not every employer offers such a payroll convenience.)

This ESA seems part of how American public policy looks to employment relationships as the locus for seeing to health and financial needs.

Bill Presson and David Rigby, do you think recordkeepers will take up this idea?

Do business interests differ between mega recordkeepers and smaller recordkeepers?

Do business interests differ between those with banking businesses and those without?

Do business interests differ between those with investment-management businesses and those without?

What fees would a service provider charge to meet this activity’s operating expenses and other costs without subsidy from another business?

(Recognize there might be little margin on the principal-preservation investment. And the rules require allowing up to four withdrawals in a year without a charge on taking a withdrawal.)

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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This provision was new to me when I read this thread.  I'm a (mostly retired) consultant, not a record-keeper. 

  • That said, from the latter point of view, I expect ALL recordkeepers to avoid this.  If I were consulting with such organization, I would recommend they refuse to take on any plan with such provision and refuse to allow any use by existing plans.
  • From the consulting viewpoint, similar to Belgarath's comment, I cannot imagine any value to the employer and/or the employee population.  I foresee abuse, as well as significant additional administrative costs.
  • IMHO, the issue raised by Peter in the original post is valid, and an area of potential abuse.  Of course, the IRS and/or DOL owe the EE Ben community some direct, and rapid, answer to his question.  But no matter what is that answer, the administrative hassles of adoption could be horrendous.
  • As many have heard before, my most common advice is "think outside the box".

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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53 minutes ago, david rigby said:
  • That said, from the latter point of view, I expect ALL recordkeepers to avoid this.  If I were consulting with such organization, I would recommend they refuse to take on any plan with such provision and refuse to allow any use by existing plans.

I just had to laugh at this  - not because david doesn't speak the truth - but rather 1) it's a "deselection game" being a recordkeeper, in that whether a plan sponsor want's a capability or not, advisors/consultants design RFPs with everything legal (and some that aren't) and if you can't check the box "yes, we can do that" you run the risk of being "deselected" and 2) we've already gotten inquiries from advisors through to our sales people asking when we will have this available.....

We don't like this (Christmas Club accounts are impossible to administer in a recordkeeping shop) but we dislike catch-up Rothification even less (as do payroll providers).

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MoJo, thank you for adding your observation about the check-the-box game.

A Request-for-Proposals I’m working on now uses a different approach. The RFP deliberately omits asking a proposer whether it can administer emergency savings accounts. Further, it instructs a proposer not to mention even an optional service unless the proposer has worked out the difficulties and set fees so those without an emergency savings account do not subsidize the ESAs.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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21 minutes ago, Belgarath said:

Unbelievable. Some of these "advisors" need a swift kick. And the boots of the kicker should have crampons.

Ohh, if only......

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We already had a CPA telling our client that he'd have to have automatic enrollment/escalation in 2025. Completely ignoring the grandfathering...

One of the aspects of this business that I hate - you have to spend a lot of time responding to foolishness. Oh well, I suppose that some of my questions to our health insurer are stupid questions, so perhaps I'm just as bad. But in the fantasyland that I've constructed for myself, I never ask stupid questions. And all my answers are brilliant. (Took me a long time to construct this magical place.)

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Hi all,  the 117th Congress bill H.R. 1450 includes a provision which says an employer sponsored emergency savings account falls under the same IRC section as does Health Savings Accounts (IRC 223(f)(7) relating to transfer of account incident to divorce).  This is similar to IRC 408(d)(6) for IRAs but applies to HSA and apparently emergency savings accounts.  So no QDRO is needed but a Judgment of Dissolution/Divorce or any other DRO incident to divorce seems like it would cover the emergency account.  I know Fidelity will allow an HSA to be split under 223(f)(7) but many other administrators will not...at least that has been my experience over the years.  Happy New Year everyone!

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H.R. 1450, the Small Business Emergency Savings Accounts Act of 2021 bill was introduced in the House of Representatives on March 1, 2021 but never acted on.

H.R. 2617, the Consolidated Appropriations Act, 2023 bill passed both bodies of Congress last week and we anticipate the President will sign it tomorrow.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Thank you Peter for the correction!  After reading the ESA section of H.R. 2617 it would seem that if the ESA is part of the retirement plan offered by the employer then it would be subject to division by QDRO.  I definitely need to research this more and thank you for posting this question!

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So I finally got up to this section of the bill. First, it's relatively speaking a small amount of money. Fidelity has a piece already on its website that says contributions are limited to $2,500 annually, but the way I read it that's not right, i.e. the account cannot exceed $2,500 at any point in time, I think.

Second, it will be part of an ERISA pension plan, but it doesn't fit the definition of a pension benefit, so I think if they wanted, Peter, the DOL could probably regulate that the ESA is not a "benefit" for purposes of Section 206(d). But I don't see the problem either way, really, since again it's a small amount of money.

True, there is a lot of complexity, but I think it's like the provision for matching student loan payments, i.e., it's an attempt to allow folks who aren't in a great position to save for retirement to be allowed to save in a way they otherwise would and still get the employer match on their money. That's the difference from a payroll deduction program. There is an assumption, I guess, that folks making, say, $40,000, will understand this and use it. Maybe. (I use $40,000 even though the provision is available to anyone who is not an HCE because in the space between $40k and the HCE cutoff most folks are able to make retirement savings contributions.)

As far as administrability and employer  take-up, my guess is that the folks who lobbied for this are providers that combine 401(k) with payroll services. This and other provisions of the bill really are only going to work for larger employers with tight integration between HRIS, payroll, and 401(k). While on the topic of the systems integration that will be needed by some of the SECURE 2.0 provisions, separate subject, but I mean, now the government is going to be contributing the saver's credit to the individual's 401(k) account or IRA. Sort of like a retirement stimmy.)

One glitch that I see is that the provision itself does not seem to provide for treating the deferral into the ESA as an elective deferral for purposes of 401(k) testing. I think they do treat the employer's match on the amount as a matching contribution for 401(m), and I think the intent is that if the employee wants, the first 3% of their elective deferral or autodeferral will go into the ESA, so I think the intent is to count it for 401(k) nondiscrimination. Note that while I've finished reading thIS entire, very long section, once, I may have missed this. Also, I'm not through reading the rest of the bill, so the way ESA is treated for nondiscrimination testing may come up later in a seemingly unrelated provision.

As a general note, on any of the above, or any other aspect of SECURE 2.0, I could be wrong. This is a really complex bill and not written with economy of expression in mind. Definitely a big move away from tax simplification. I remember a decade or so ago when one of the retirement initiatives in Congress was to simplify all types of DC's (401(k), 403(b), 457(b)) into a single type of tax-qualified savings plan and simplify other rules, e.g. distributions. This is definitely not that.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Luke Bailey, thank you for your observations. And for causing me to look up the word stimmy.

https://www.merriam-webster.com/words-at-play/stimmy-stimulus-words-were-watching

About whether an ESA is a pension benefit:

ERISA § 3(45) defines an ESA as “established and maintained as part of an individual account plan”, which ERISA § 3(34) defines as a pension plan.

ERISA § 3(45)(A) further defines or describes an ESA as “a designated Roth account[.]”

ERISA § 110(a) grants the Secretary of Labor power to “prescribe an alternative method for satisfying any requirement of this part with respect to any pension plan, or class of pension plans (including pension-linked emergency savings account features within a pension plan)[.]”

ERISA § 404(c)(6) provides another situation in which a default investment is treated as a participant’s exercise of control. ERISA § 404(c)(6) applies “[f]or purposes of paragraph (1),” which refers to a pension plan.

ERISA § 801(a)(1) provides that a sponsor of an individual-account plan “may include” an ESA in such a pension plan.

ERISA § 801(c)(2)(A) commands that an ESA feature, if provided, “be included in the plan document of the individual account [pension] plan.”

An ESA contribution may be a subject of a matching contribution that is a part of an individual-account pension plan.

Under ERISA § 801(e), a plan with an ESA must allow, on a participant’s severance from employment (or the plan sponsor’s end of the ESA feature), a transfer from her ESA balance into another designated Roth account under the individual-account pension plan.

An ESA may involve an automatic-contribution arrangement. These need ERISA § 514(e)’s (or ERISA § 802’s) preemption of States’ wage-payment laws. Although preemption can apply regarding a welfare-benefit plan, it’s not obvious that an ESA’s benefits are fairly described as “medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services[.]” See ERISA § 3(1)(A). Although Congress might have power to supersede State law regarding something that is neither kind of employee benefit, a court might find that a provision stated in part 5 or part 8 of subtitle B of title I of ERISA refers to an employee benefit ERISA § 3 describes.

A plan’s administrator may consolidate notices about an ESA with notices under ERISA § 404(c)(5)(B) and ERISA § 514(e)(3).

As I read ERISA § 206(d), that a pension plan includes an ESA feature does not alter the plan’s recognition of a qualified domestic relations order. But this might be no more burdensome regarding an ESA than for any other aspect of a plan that permits a QDRO distribution before the participant’s earliest retirement age. What’s different is that an ESA feature might bring in some participants who otherwise might have no account balance for a QDRO to reach.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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1 hour ago, Peter Gulia said:

As I read ERISA § 206(d), that a pension plan includes an ESA feature does not alter the plan’s recognition of a qualified domestic relations order. But this might be no more burdensome regarding an ESA than for any other aspect of a plan that permits a QDRO distribution before the participant’s earliest retirement age. What’s different is that an ESA feature might bring in some participants who otherwise might have no account balance for a QDRO to reach.

Peter, I was only suggesting that if DOL wanted to, they might be able to exclude ESAs from QDROs, but your explanation above is probably the right take on how this should play out.

1 hour ago, Peter Gulia said:

And for causing me to look up the word stimmy.

I just heard it for the first time a few days ago on a podcast. I think it captures the economic moment we had and possible effects on future policy. It does seem to me that the stimulus checks to some extent paved the way for the way the savings credit will work going forward.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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