Debate: Has IRS Guidance Helped Make the Case for Emergency Savings Accounts?

Byrnes: The complex guidance only shows employers that these “sidecar” emergency savings accounts are complex and should be avoided. Once again, the IRS has overcomplicated an issue to the point where employers will have to learn a new set of rules to avoid running afoul — and many employers simply aren’t going to bother with it, especially small business owners who are already dealing with enough complication in administering retirement plans themselves.

Bloink: Complexity alone is no reason to assume that employers will shy away from offering these valuable new employment benefits. Because the accounts are related to defined contribution plans already maintained by the employer, offering the additional benefit doesn’t really create much added complexity in the end, at least from the employer’s perspective. Besides, the guidance is clear and addresses the important issues that employers must understand when implementing these accounts.

Byrnes: From a more substantive perspective, nothing in this guidance would actually encourage employers to start offering these accounts — and the participants who might use them as “supplemental” Roth accounts are likely those who have the ability to independently fund their own savings plans.

Bloink: We’re talking about a wholly new type of savings vehicle. Employers and employees have absolutely no experience with these emergency savings accounts. The program is also slightly experimental — it seems that the provision is designed to limit account balances to $2,500 initially. If the program is successful, it’s entirely possible that the agencies could expand the rules to allow for larger contributions. However, we do also have to remember that these accounts are designed primarily to benefit the lower- and middle-income taxpayers and to put the issue of emergency saving on their radar. That alone could have a positive impact when it comes to employee savings.

Byrnes: Yes, encouraging employees to start saving for emergency situations is admirable and may help to stop retirement account “leakage.” However, any impact is going to be miniscule because these account balances are limited to $2,500. Further, the accounts have no real tax advantage because contributions are made with after-tax dollars and employers have the option of forever capping any participant’s balance at $2,500 — so the benefit of tax-free growth is minimal. 

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