Unfortunately, many employees experience financial stress. So, more employers are stepping up to help by offering their workers emergency savings accounts funded by payroll deductions.
As the COVID-19 pandemic continues, workers have had trouble saving money for a rainy day.
Recent research shows that 37% of U.S. households couldn’t come up with $400 for an emergency expense if necessary. And 52% of mid-income households don’t have the funds on hand to cover their expenses for the next three months.
Worrying about money can hurt employees’ productivity at work. That can negatively impact your bottom line. Allowing them to contribute a portion of their pay to an emergency savings account right off the bat makes saving more convenient. This may help alleviate their financial concerns.
Plus, employees like this benefit, too. In fact, 71% of people surveyed by AARP said they’d likely participate in a rainy-day savings program funded by payroll deductions if they had the option. The benefit may even improve your retention rates, cutting down on the costs of hiring.
Emergency savings accounts also keep employees from seeking loans or early distributions from their existing retirement savings. This saves your Payroll team a lot of hassle and time.
Overview on savings accounts for employers
Right now, employers have two options for setting up emergency savings accounts for workers. They can create accounts directly within their existing 401(k) plans where employees can make contributions or they can allow workers to make contributions to an account at an outside bank or financial institution.
Any employee contributions to emergency savings accounts must be taxed beforehand. Employers can also make matching contributions to workers’ accounts. In addition, contributions over a certain level can be put toward other investments – e.g., a 401(k).
Before offering this option to employees, it’s important to decide whether you’ll manage the accounts within your plan or out of plan. Also consider whether employees must sign up to participate or if you’ll set up auto-enrollment.
Third-party vendors usually manage these accounts. That means it’s key to do research to find one that meets your needs and the needs of your employees. Work closely with your Payroll and Finance pros to select the best option.