Why should employers provide an out-of-plan emergency savings account?

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Devin Miller
June 23, 2021

The benefits of out-of-plan Emergency Savings Accounts (ESAs)

Key takeaways:

  • Over half of Americans don't have enough money in savings.
  • Out-of-plan ESAs allow employees to save money directly from their paychecks.
  • “Out-of-plan” means they are not part of a 401(k) or other retirement plans. These out-of-plan ESAs are also referred to as “sidecar plans.”
  • Out-of-plan ESAs help to reduce the rate of employees taking money out of their retirement accounts.
  • Employees are stressed by their lack of savings.
  • Helping employees save reduces their stress levels.
  • Employees with less stress are more productive and happier. 

One in four American households do not have any money set aside in an emergency savings account and although financial advisors suggest having at least three months of living expenses in liquid savings, another 26% of Americans don't have that either. 

Over half of Americans, in other words, cannot afford a sudden job loss. They also do not have the liquid reserves to pay for an unexpected car repair, an unusually large utility bill, or a broken-down appliance. They do not have the funds to cover the cost of a funeral or many medical expenses.

The lack of savings is not just a financial problem. It increases stress levels and makes it harder to focus on work and other obligations. An out-of-plan ESA is one way that employers can help their employees save for unexpected emergencies. These accounts are becoming increasingly popular with benefit plans, particularly in the wake of the COVID-19 pandemic.

This guide explains out-of-plan ESAs and looks at their advantages for both employees and employers.

What is an out-of-plan ESA?

An out-of-plan emergency savings account is a savings vehicle offered by an employer to their employee. These accounts are called “out-of-plan” because they are not part of the employer’s retirement plan. They exist outside of that and are sometimes called “sidecar plans.” Employers can offer these accounts, whether or not they have 401(k) or other retirement savings plans.

How do out-of-plan ESAs work?

These plans allow employees to designate how much they want to be withdrawn from their paycheck. They can choose a percentage or a flat dollar amount and the employer can opt to match a certain portion of the savings. The process happens automatically, making it easier for employees to save. 

Out-of-plan ESAs are customizable. Employers can add bonuses once their employees have saved a certain amount toward their goal or maintained a balance for a steady amount of time. Employees have complete control over their accounts — they can access the funds easily whenever they need cash for an emergency. 

What are the tax implications of an emergency savings fund?

The funds are taken from employees' paychecks after taxes. Contributions to an out-of-plan ESA are not tax-deductible for employees. Employers get to deduct any costs they incur from employee pay and benefits

How do emergency savings accounts benefit employers?

ESAs make employers more attractive to top talent. Many employees have several options when choosing an employer and they naturally gravitate toward those who offer the best pay, benefits, and organizational culture. These types of benefits also help to reduce employee stress, which directly boosts productivity, job satisfaction, and retention. 

How do ESAs help with retirement savings?

Employees who don't have liquid savings accounts often take from their retirement plans. Cashing out retirement plans in the midst of COVID became so common, in fact, that the government created special tax rules to help people who were forced to make these withdrawals. 

Employees with ESAs are half as likely to dip into their retirement accounts. Helping employees take money out of their retirement accounts can be time-consuming for the human resources team and these withdrawals also disrupt the employee's ability to save for their retirement, which can increase their stress levels. 

ESAs also help to change employees' savings habits. They become more aware that they need to save for both short and long-term needs. They stop letting short-term needs edge out long-term savings goals.

How do ESAs reduce stress?

In April of 2020, nearly 9 in 10 employees said that the pandemic was causing stress on their finances and 41% were worried about emergency savings. 

This stress bleeds into the workplace. Say someone’s main mode of transportation breaks down. They don't have any way to get to work and they don't have money set aside to pay for the repair. 

A few hundred or thousand dollars in a savings account has the potential to solve this problem instantly. The funds from a savings account can pay for the repair and rent a vehicle to get to work for a few days. Then, the employee will be less distracted at work because they're not worrying about transportation, how to pay for the repair, or how to cover the rest of their bills. 

How do out-of-plan accounts encourage saving?

These savings plans encourage saving because they make the process automatic. They also feature dashboards that track employees' savings goals and show their progress. Employees can access these funds any time they need, but they tend to be more cautious about withdrawing funds from an employer-related savings vehicle than a personal savings account. 

Employees become more accountable to themselves when the savings plans are through their employers. They may be more likely to withdraw funds for frivolous purposes from their own accounts, in contrast. 

How do you set up an out-of-plan savings account?

Setting up an out-of-plan ESA can be done manually with a bank and split deposits. This is not something an HR department can do at scale nor is it common with employees, however. 

An ESA can also be set up the easy way from a specialty vendor that can automate the process, like Secure. We can help you communicate the plan with employees and assist with the tech aspects of syncing the plan with your payroll. 

Contact Secure to help your employees save

Secure offers an easy-to-use, out-of-plan emergency savings account, called SecureSave, that can help your employees save automatically. Employees want this benefit – 70% say they would save with an employer-sponsored savings plan and 90% say they would save with employer matches. Secure can purpose build out-of-plan ESA solutions and technology to automate the capability. Learn more by contacting us at www.securesave.com or sign up to help your employees start saving today.

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