The American Retirement Association has offered its support for newly introduced legislation that would provide a penalty-free “emergency distribution” option from employer-sponsored retirement accounts and IRAs.
The Enhancing Emergency and Retirement Savings Act of 2021 (S. 1870) was introduced May 27 by Sens. James Lankford (R-OK) and Michael Bennet (D-CO) to help encourage participation in retirement plans by giving individuals additional flexibility and penalty-free access to funds should a family emergency hit.
“The Enhancing Emergency and Retirement Savings Act smartly leverages the existing workplace-based retirement plan system to address this emergency savings problem while ensuring Americans continue to save for a secure retirement following an emergency,” Brian Graff, Executive Director and CEO of the American Retirement Association, wrote in a May 28 letter supporting the bill. “The legislation creates a new category of distribution in a 401(k) or similar plan that would allow workers who have a certain balance in these accounts to quickly access their savings to address a personal financial emergency without an additional tax penalty and a minimal amount of paperwork.”
Under the legislation, one emergency distribution would be permitted per calendar year. Distributions would be limited to vested amounts over $1,000, with an annual maximum withdrawal of $1,000. Additionally, the legislation requires that the individual replenish the withdrawn amount back to the plan before an additional emergency distribution from that same plan is allowed.
“So many Oklahomans live paycheck to paycheck. They want to start saving for retirement, but they can’t take the risk of losing access to their money in case of an emergency,” Lankford stated in introducing his legislation. “Our commonsense bill provides Americans the flexibility to save for retirement now, knowing they have access to some of their money for an emergency and be able to pay that money back into their retirement plan.”
“Millions of families are trapped in this cycle of economic insecurity—one emergency away from everything falling apart. This bipartisan legislation will help give workers more flexibility to foot the bill for an unexpected emergency expense,” Bennet stated, noting that nearly 4 in 10 Americans cannot afford a $400 emergency expense.
The ARA’s letter further notes that the organization has concerns with the other approaches to encourage savings for financial emergencies that propose to create and automatically enroll employees into an entirely new and separate savings account program. “The ARA believes that this approach would create an unnecessary administrative burden for employers and would potentially expose employers to more liability if something goes wrong,” the letter states.
In addition, it notes that separate accounts would also discourage long-term retirement savings as workers would be less likely to save in their 401(k) plans if they are already automatically saving in a separate emergency savings account.
Even before the emergence of the COVID-19 pandemic, there have been growing calls among policymakers, industry stakeholders and think tanks to create employer-based emergency savings programs to help individuals establish rainy-day funds. Those calls have only grown louder since the onset of the pandemic, but there remains an ongoing debate about the makeup of such a solution, including whether such accounts should be a separate program, sidecar accounts within the context of a defined contribution plan, or whether to build off the CARES Act and disaster relief legislation, allowing distributions for certain emergencies.
Lankford and Bennet both serve on the Senate Finance Committee, which has jurisdiction over the legislation. The committee is currently chaired by Sen. Ron Wyden (D-OR), who is expected to release comprehensive retirement savings legislation in the coming weeks.
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