How to Manage Employee ESAs with Confidence

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By
Devin Miller
November 14, 2022

Employer-sponsored ESAs provide employees with financial support, but make sure you’re prepared for risks and administrative responsibilities with these best practices

Providing an employer-sponsored emergency savings account (ESA) is a step in the right direction for improved employee satisfaction and engagement. But there are a lot of moving parts you need to manage to make sure everything’s being properly administered, the money isn’t being misused, and you’re doing all you can to prevent fraud.

Theft does happen. With an ESA, there’s some risk involved that the employer has to take on when offering this benefit. However, with the right strategies and best practices, you can safely and successfully conquer benefit plan administration.

How does an employer-sponsored emergency savings account work?

When running an employer-sponsored ESA, you’re allowing employees to put money aside specifically for emergencies, like a “rainy-day” fund. A consumer finance report found that 61% of American consumers live paycheck to paycheck, including people making well into the six figures. 

Employees may not be prioritizing savings, especially not emergency savings. When they’re hit with an unexpected high cost, such as a hospital stay, a car repair, or an extensive house repair, they’ll have to go into debt or tap into their retirement savings to cover it.

ESAs give people more financial protection. Employees can save money from their paychecks each month and create a healthy savings account for emergencies. ESAs are typically inexpensive for employers to administer, yet they can significantly impact employees’ financial well-being. 

Employers decide the terms of the accounts, such as contribution limits, and whether they want to match their employees’ contributions each month. The account can then be integrated with payroll, so deductions happen automatically and employees see their accounts start building.

Some employers are seeing over 50% adoption when they start offering an emergency savings fund to employees.

Risks of ESAs

While ESAs help employers improve employee engagement and could even lead to a better employee retention rate, there are a few risks associated with managing and administering the benefit plan.

First, employees need to fully understand the ESA, its benefits and purpose, and how to use it. Otherwise, they may not take full advantage of the benefit or keep their savings solely for emergencies. 

In addition, simple ESAs do not provide the same tax benefits as retirement savings accounts. For instance, with a Roth IRA, employees can decide to pay taxes on their savings now to avoid doing so in retirement when they start taking withdrawals. With a 401(k), employees can put off paying taxes on their contributions until they reach retirement. 

So there is some tax flexibility with retirement accounts that employees don’t have with ESAs, as contributions to ESAs are taxed as normal income, and the funds are available for use right away. Employees simply set aside a specified amount of money so they can separate normal income from their emergency savings.

Employers also have to take on some liability with ESAs, since they’re holding onto employees’ money for them and have to be able to account for each employee’s contributions and individual balances. Even when using a third party for ESA administration, employers will still be the legal account owner.

Along with offering an ESA come additional administrative burdens and costs. Employers need to create a strategy for managing ESAs and stay consistent in tracking and management.

How to manage and administer an ESA safely

As with any financial benefit for employees, company leaders must be diligent about management and administrative practices to reduce liability and ensure success. Fraud does happen within companies of all sizes, and sometimes it’s the company’s own employees instigating the theft. 

Here are a few ways to more effectively administer ESAs to your employees:

(H3) Set up a separate bank account for ESA funds

Always create a new bank account reserved for the ESA funds you and your employees are contributing. You don’t want this money to get lost in the general accounts for the business.

(H3) Set up internal anti-fraud controls

Put controls in place within all financial systems that will prevent or uncover fraud, like multi-factor authentication for logins, stricter access control, and timestamped transactions for better data accuracy. Follow traditional accounting controls for ESA accounts and ensure that someone looks at statements and transactions consistently and thoroughly.

(H3) Train employees about the risks of fraud

Make sure you stay committed to training workers on the risks and effects of fraud. Educate them on what phishing scams look like to further protect their financial assets. Encourage them to monitor their ESA balances and transactions regularly to detect any strange activity or errors.

(H3) Separate accounting duties

Don’t give anyone sole control over a cash account such as an employer-sponsored ESA. It’s more likely that instances of fraud will go unrecognized if there’s only one person handling the business's financial functions.

(H3) Conduct audits

Diligently monitoring emergency savings account information and tracking transactions will help you stay on top of errors or fraud. But it’s also wise to conduct regular in-depth audits. ESAs are cash accounts, after all, so they may be more susceptible to instances of fraud than other types of assets.

(H3) Find the right ESA program

There are now simple tools to help you administer and monitor ESAs. Find a platform that enables you to track contributions and balances, integrate with your existing payroll systems, and set up alerts for unexpected activity. 

Choose the right provider

It’s crucial to find an established ESA provider that will help you accurately and safely set everything up for efficient contributions and withdrawals, thus minimizing risks and making it easy for you and your employees to manage their emergency funds.

With the right solution and best practices, you can confidently manage ESAs for employees, ensuring accuracy, efficiency, and security.

Learn how an ESA program from SecureSave empowers your employees to prepare for a more prosperous financial future. Contact us now to get started.

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Devin Miller

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