As people watch their savings sink under the pressure of inflation, a provision in Congress’s year-end spending agreement aims to make it easier for workers to save money for life’s unexpected expenses.
Employers would have the ability to create emergency savings accounts for workers alongside the retirement accounts they offer, according to a provision in the bag of legislative fixes affixed to Congress’s recently announced “omnibus” spending package.
The last one: Pelosi says she hopes House can approve the $1.7 trillion spending bill tonight
The statute that prompts people to automatically save money for unexpected spending is one part of a series of retirement-related provisions, known as the Secure Act 2.0, that are in the spending deal. When it comes to emergency savings accounts, the most an account can hold at any one time is $2,500.
The deal has yet to pass the US House of Representatives, the US Senate, and get President Joe Biden’s signature.
Senator Todd Young, a Republican from Indiana, and Senator Cory Booker, a Democrat from New Jersey, had 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 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 common-sense, bipartisan solution that would help families build stable emergency savings for unexpected expenses while keeping retirement accounts intact for the future.”
Booker said Tuesday he was “thrilled” that emergency savings provisions were included in the omnibus deal and urged their swift approval. “This bill would help workers create savings for short-term unexpected costs, while also putting them on the path to a more financially secure retirement,” he said.
The provisions will go into effect in January 2024, Booker’s office said.
The savings and retirement provisions come at a time when inflation continues to drain the wallets and spirits of Americans. The personal savings rate, which refers to the percentage of disposable income that households save, fell to 2.3% in October, the second lowest point since 1959.
Long before the latest savings rate data, emergency savings for unexpected costs were a low point for millions of Americans living from paycheck to paycheck. More than two-thirds of Americans (68%) say they would cover a $400 unexpected expense in cash or cash equivalent, according to a May Federal Reserve report.
It’s up from 50% in 2013, the Fed said, but higher costs have been grinding into wallets while stimulus checks and increased child tax credits are far in the background.
Here’s how the emergency savings provisions in the spending account would work: If employers set up the accounts and if workers opted to participate, a portion of their paychecks would automatically go into a savings account. The offer applies to “low-paid employees” in the eyes of the IRS. In 2023, that’s a worker earning less than $150,000.
Contributions are capped at $2,500 but employers can lower the cap, according to a section-by-section explanation from Congress of what’s in Secure 2.0.
Any contributions over the annual account limit go into a Roth defined contribution plan (which is funded with after-tax cash).
The first four account withdrawals each year are free. When workers leave their jobs, they can cash out the account or put the money into a Roth IRA or other Roth defined contribution plan.
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