No Emergency Savings? New Workplace Benefits Aim to Help

Nearly 1 in 5 Americans admit they saved no money at all in 2021, according to a survey by MagnifyMoney.

Saving can be especially difficult for low- and middle-income consumers. Of those making $35,000 or less a year, nearly one-third of respondents said they saved no money at all last year, the survey found. 

The pandemic has been a wake-up call for many Americans to prepare financially for unexpected expenses — from a job loss or medical expenses to a car repair. "Covid did, I think, reveal the need for more emergency savings, particularly for low- and moderate income households," said Voya Financial senior vice president Jeff Cimini.

A survey by Betterment found nearly half of full-time workers — 46% — who didn't think they needed an emergency fund before the pandemic say they do now. 

Employers have taken note. They're offering a number of ways employees can build emergency funds, from savings programs through banks to special accounts alongside traditional retirement plans. Another workplace benefit — health savings accounts, or HSAs — can also be used to cover emergency medical needs. 

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Benefits experts say if employees have access to other savings choices, they'll be less likely to dip into their 401(k) plans or other retirement savings to cover these expenses. About 2.8% of defined contribution or retirement plan participants made withdrawals in 2020 and the same percentage withdrew funds in the first half of 2021, according to the Investment Company Institute. While that is a relatively small share, it is the greatest percentage of retirement plan withdrawals in more than10 years of ICI survey data. 

In this pandemic, "one of the things that we saw in Voya in our retirement business was a significant increase in employees tapping their long-term retirement savings to meet short-term needs," Cimini said. Voya Financial began offering a broad set of emergency savings options to its workplace clients in 2020.

Some 26% of defined contribution plan sponsors allow Roth or after-tax contributions in retirement accounts to build "emergency funds", according to a survey by benefits consulting firm Willis Towers Watson. Another 60% of plan sponsors are interested in offering one of those options, to help employees build savings that can be tapped for short-term needs.

"We've seen a lot of activity with our clients in terms of trying to help their employees best navigate this very challenging period," said David Amendola, a senior director at Willis Towers Watson. "Employers are increasingly starting to adopt and think about different ways to implement these types of emergency savings accounts so that employees can access funds more easily and in a more targeted fashion." 

HSAs are another financial wellness benefit that employers are offering to help workers build emergency savings. You must have a high deductible health plan (HDHP) to participate. If you do, you can contribute up to $3,650 in a HSA for self-only coverage in 2022, and up to $7,300 for family coverage. If you don't use the HSA money for immediate health-care expenses, unspent funds can roll over from year to year.

"It's a way to cover that deductible if you have a lot of expenses in a year," said Baltimore-based certified financial planner Roger Young of T. Rowe Price. "It's also a way if you can put away that money long-term to invest -- and you get great tax benefits."

Money goes into an HSA tax-deferred, earnings grow tax-free and the distribution of those funds is generally tax-free if the money is used for qualified medical expenses. "So there's a real advantage to putting money in a HSA," agreed Amendola.

Surveys show there is also an advantage in attracting new hires and retaining employees for employers who offer financial wellness benefits.

If a prospective employer offers an HSA or flexible spending account (FSA), about 33% of workers said that could entice them to leave their current job, according to the Betterment survey. Some 27% said they'd consider making a move if a new employer offered an emergency fund. And, overall, 74% of workers said they would be likely to leave a job for an employer that offered better financial wellness benefits.

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