As people watch their savings sink under inflation’s pressure, one provision in the congressional year-end spending deal aims to make it easier for workers to save money for life’s unexpected expenses.
Employers would have the option of creating emergency savings accounts for workers alongside the retirement accounts they offer, according to one provision in the grab bag of legislative fixes tacked onto Congress’s recently announced “omnibus” spending package.
The statute nudging people to automatically save cash for unbudgeted expenses is one part of an array of retirement-related provisions, known as the Secure Act 2.0, that are in the spending deal. When it comes to the emergency savings accounts, the most an account can hold at any one time is $2,500.
The deal still has to pass the U.S. House of Representatives, the U.S. Senate and get President Joe Biden’s signature.
Sen. Todd Young, a Republican from Indiana, and Sen. Cory Booker, a Democrat from New Jersey, previously introduced the provisions through their “Emergency Savings Act.” The change wouldn’t be a complete cure-all for Americans’ shaky personal finances — but it was an easy next step, they’ve noted.
“We can’t always predict the future, and too many families encounter situations where they struggle to cover unexpected expenses through no fault of their own,” Young said in a statement Tuesday. “This bill is a commonsense, bipartisan solution that would help families create stable emergency savings for unforeseen expenses, while keeping retirement accounts intact for the future.”
Booker said Tuesday he was “thrilled” the emergency savings provisions were included in the omnibus deal and urged its quick passage. “This bill would help workers to build savings for short-term, unexpected costs while also putting them on a pathway for a more financially secure retirement,” he said.
The provisions would take effect in January 2024, Booker’s office said.
The retirement and savings provisions come at a time when inflation keeps draining Americans’ wallets and spirits. In October, the personal savings rate — which refers to the percentage of disposable income that households save — fell to 2.3%, the second-lowest point since 1959.
Long before the latest savings rate data, emergency savings for unexpected costs have been a weak spot for millions of Americans living paycheck to paycheck. More than two thirds of Americans (68%) say they would cover an unanticipated $400 expense with cash or its equivalent, according to a Federal Reserve report in May.
That’s up from 50% in 2013, the Fed said — but higher costs have been grinding at wallets while stimulus checks and boosted child tax credits are far in the background.
Here’s how the emergency savings provisions in the spending bill would work: If employers create the accounts and if workers choose to participate, a portion of their paycheck would be automatically transmitted into a savings account. The offering applies to “non-highly compensated employees” in the eyes of the IRS. In 2023, that’s a worker making under $150,000.
Contributions are capped at $2,500 but employers can set the ceiling lower, according to a congressional section-by-section explanation of what’s in Secure 2.0.
Any contributions beyond the account’s yearly cap are put into a Roth defined contribution plan (which is funded with after-tax money).
The account’s first four withdrawals every year come out free of fees. When workers leave their job, they can cash out the account or roll the money into a Roth IRA or another Roth defined contribution plan.