Retirement law lets employers pair emergency savings and 401(k)s, but few are doing so

Employers don’t appear eager to mix their 401(k) plans with emergency savings options for workers, new research suggests.

Although companies have been permitted since 2024 to allow $1,000 emergency withdrawals from retirement savings and to offer 401(k)-linked emergency savings accounts, there’s been little adoption, according to a Vanguard report released this week. 

Just 4% allow the $1,000 emergency 401(k) withdrawals, according to Vanguard’s analysis of 1,300 plans. And the 401(k)-linked emergency savings accounts “have generated minimal to no interest” from employers, the report notes.

Those two in-plan options were authorized under the 2022 retirement legislation known as Secure Act 2.0, amid growing concern about Americans’ lack of emergency savings.

Although the vast majority of employers are not providing the 401(k)-linked accounts — technically called pension-linked emergency savings accounts — some companies are offering external emergency savings accounts, said Craig Copeland, director of wealth benefits research for the Employee Benefit Research Institute. These external accounts are generally held at FDIC-insured banks and after-tax contributions are made through payroll deductions.

Building and maintaining emergency savings can be tricky for many households, especially those that are struggling to keep up with the high cost of living. Although inflation has eased to a yearly rate of 2.4% since peaking at 9.1% in June 2022, prices overall have climbed more than 25% since 2020, based on the consumer price index.

Financial advisors generally recommend having three to six months’ worth of living expenses set aside as emergency savings.

Yet just 47% of respondents in a December survey said they have the funds to cover a $1,000 emergency expense, according to Bankrate’s yearly Emergency Savings Report, released last week. Additionally, 29% said they have more credit card debt than they do in emergency savings. 

Last year, employer worries about their workers’ financial well-being reached a new high: 48% rated their concern at 9 or 10 on a scale of 1 to 10, up from 43% in 2024 and 39% in 2023, according to December research from EBRI. As recently as 2019, the year before the pandemic hit, that share stood at 22%.

Secure 2.0 created the pension-linked emergency savings accounts as a “sidecar” to a 401(k). That is, they are established and maintained within the 401(k) plan itself. Among other particulars, contributions are after-tax — treated as Roth contributions — and count toward the 401(k) contribution limit. For 2026, that amount is $24,500, with investors age 50 and older allowed an additional $8,000.

The legislation set the maximum annual contribution for the emergency account at $2,500 with inflation adjustments in the future, and this year it was increased to $2,600.

As for the $1,000 emergency 401(k) withdrawal: Most employers — 94% as of 2024, according to Vanguard — already allow their workers to access their retirement savings if they are facing financial hardship.

“In many cases, it would add something that’s already being provided,” Copeland said.

While employers have largely eschewed the Secure 2.0 emergency savings provisions, that could change over time.

“If a plan sponsor wants to move forward with an emergency savings program at their company, they’re going to analyze the options available, and part of that [analysis] will be what’s easiest to implement,” said Will Hansen, executive director of the Plan Sponsor Council of America.

“A $1,000 withdrawal is easier than a [401(k)-linked account] and an account not affiliated with the plan could be an easier feature as well,” Hansen said.

Among other administrative complexities, one of the sticking points with 401(k)-linked accounts is that highly compensated employees — under one IRS test, those earning $160,000 or more — are not permitted to participate. That’s an administrative challenge because workers’ incomes can fluctuate, which makes it tricky for a 401(k) plan’s recordkeeper to monitor, said Brandie Barrows, a partner with Hall Benefits Law in San Francisco.

A bipartisan bill introduced in December in both the House and Senate would expand eligibility to use the accounts. Called the Emergency Savings Enhancement Act, the measure would eliminate the exclusion for highly compensated employees and would increase the annual contribution limit to $5,000.

“It wouldn’t hurt to take that exclusion off and increase the amount that people can save,” Barrows said.

In the meantime, experts say, employers will likely continue to partner with external firms that offer emergency savings accounts. Recent research from EBRI shows that 51% of firms with 500 or more employees offer some sort of emergency fund. That includes external savings accounts, but is not broken out in the data.

“If they offer it outside the plan, it’s pretty straightforward,” Copeland said. “It’s less complicated” than setting up an account within the 401(k) plan, he said.

There is a liquidity issue, as well, with keeping emergency funds inside a 401(k) plan, Copeland said. “Outside the plan, it’s much easier to get your money immediately, whereas getting it out of the plan could take two to three days at a minimum,” he said.