What Is An Emergency Savings Account (ESA) And How Does It Work?
When you think of employer-sponsored savings accounts, your mind may go right to 401(k)s. But there’s more than just those. An Emergency Savings Account (ESA) is an employer-sponsored workplace plan that helps you build an emergency fund of savings.
In fact, employees with ESAs are 50% less likely to draw money from their retirement funds, compared to those without an ESA, according to findings from SecureSave. Read on to learn more about ESAs and how they work.
How does an ESA work?
If you choose to enroll in an ESA, money is automatically deducted from your paycheck — similar to a 401(k). But unlike a 401(k), the money you contribute to an ESA is usually not a percentage of your paycheck but rather a fixed amount, like $50. Also unlike a 401(k), ESA contributions are after-tax, not pre-tax.
Your employer can also match your ESA contributions to incentivize enrollment and help you grow your savings faster.
In-plan vs. out-of-plan ESAs
There are two types of ESAs: in-plan and out-of-plan ESAs. Both plans allow you to automatically contribute after-tax money, so contributions don’t reduce your taxable income. Funds for both accounts are also typically placed in a high-interest account or risk-averse investment.
In-plan ESAs
In-plan ESAs are also known as Pension-Linked Emergency Savings Accounts (PLESAs) and they are linked to employees’ retirement saving accounts, like a 401(k) or 403(b). This means that only employees who are eligible for a workplace retirement savings account can enroll in an in-plan ESA.
In-plan ESAs have a contribution limit of $2,500 per year, but the maximum contribution can also be set by the employer, which means they can make it even lower.
There may also be some limitations around withdrawals for in-plan ESAs. According to the Department of Labor, you can’t be charged any fees for the first four withdrawals from a PLESAs in a plan year. However, additional withdrawals can be subject to penalty fees.
Account holders also don’t need to prove that they have a legitimate emergency in order to make a withdrawal.
Out-of-plan ESAs
Out-of-plan ESAs are not linked to any workplace retirement accounts. Because of this, they can be offered to employees who typically are not eligible for employer-sponsored retirement accounts. There is no cap on how much you can contribute to this account.
Funds aren’t subject to any withdrawal limitations unless otherwise noted by your employer.
Pros and cons of ESAs
Here’s a breakdown of the benefits and drawbacks when it comes to ESAs.
Pros
- Contributions are automatically taken out of your paycheck, so you don’t have to think about it
- Contributions are placed in high-interest accounts or investments that can help them grow
- No early withdrawal penalty that can be incurred with traditional retirement accounts
- Employers can match contributions
- You don’t need to prove hardship in order to make a withdrawal on either type of account
Cons
- Contributions don’t lower your taxable income since they are post-tax
- The contribution limit on in-plan/PLESAs are quite low at $2,500 per year
- Out-of-plan ESAs don’t typically allow for auto-enrollment
- Not all employees may be eligible for an in-plan/PLESA since it’s tied to employer-sponsored retirement accounts
- Not all employers offer a match
ESA alternatives
If your employer doesn’t offer an ESA, you can still build your emergency savings by opening your own high-yield savings account. CNBC Select ranks the Western Alliance Bank High-Yield Savings Account as one of the best because it offers one of the highest APY’s right now and has just a $1 minimum deposit to open the account. There are no monthly fees and no overdraft fees on this account.
Western Alliance Bank High-Yield Savings Account
Western Alliance Bank is a Member FDIC.
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Annual Percentage Yield (APY)
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Minimum balance
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Monthly fee
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Maximum transactions
Up to 6 transactions each month
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Excessive transactions fee
The bank may charge fees for non-sufficient funds
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Overdraft fee
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Offer checking account?
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Offer ATM card?
Pros
- Strong APY
- Low minimum deposit required
- No monthly fees
Cons
- Bank may charge non-sufficient funds
- Doesn’t offer checking account or ATM access
- Accounts are opened and managed on Raisin.com
The Marcus by Goldman Sachs High-Yield Online Savings Account is another top account for not charging any overdraft fees, monthly fees or excessive transaction fees. There’s no minimum deposit required to open the account, but, of course, you will need to make a deposit in order to begin earning interest.
Marcus by Goldman Sachs High Yield Online Savings
Goldman Sachs Bank USA is a Member FDIC.
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Annual Percentage Yield (APY)
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Minimum balance
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Monthly fee
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Maximum transactions
At this time, there is no limit to the number of withdrawals or transfers you can make from your online savings account
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Excessive transactions fee
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Overdraft fee
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Offer checking account?
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Offer ATM card?
Pros
- Strong APY
- No minimum balance or deposit
- No monthly fees
- No limit on withdrawals or transfers
- Easy-to-use mobile banking app
- Offers no-fee personal loans
Cons
- Higher APYs offered elsewhere
- No option to add a checking account
- No ATM access
Should you contribute to an ESA?
There are few downsides to contributing to an out-of-plan ESA offered by your employer, especially since you may earn a match on your contributions, won’t be taxed on your withdrawals and there’s typically no cap on how much you can contribute per year.
One huge benefit to ESAs in general is that they help automate your savings for a rainy day, so you don’t have to think about it; you don’t even get the opportunity to consider spending the money on something else instead of making the contribution.
If you have trouble consistently contributing to your emergency fund on your own, then an ESA could make it easier to build those savings. If your employer offers an in-plan ESA, though, just be aware of any restrictions and make sure you agree to the terms before enrolling.
ESA FAQs
What’s the difference between an emergency fund and an ESA?
An emergency fund is an individual savings account that anyone can open and designate as money for unexpected expenses. An ESA is an employer-sponsored emergency savings account that you can enroll in, either alongside a retirement account or through an out-of-plan account.
How much money should you have in an emergency fund?
Experts generally recommend having at least three to six months’ worth of expenses saved up in an emergency fund. Depending on your circumstances, you may even want to have more saved up.
How much can you contribute to an ESA?
An in-plan ESA has a yearly contribution limit of $2,500 while an out-of-plan ESA doesn’t usually have a contribution limit but employers can impose their own cap on contributions if they want to.
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