For many employees, the COVID-19 pandemic has added financial stress that can harm their ability to stay motivated and productive in their jobs. Employers can help ease the burden by including emergency savings accounts (ESAs) in their benefits package.
ESAs are funded by employees through automatic payroll deductions, just as they do with healthcare spending and retirement accounts. Unlike those other accounts, however, ESA contributions are made post-tax.
How well are Americans saving for their futures?
Over the last few years, some once-in-a-lifetime events have caused Americans to reevaluate their personal and professional circumstances. The Federal Reserve estimates that 36% of all adults cannot cover a $400 emergency, and the situation has worsened as families tap into savings to make up for pandemic-related shortfalls.
The pandemic has created commodity shortages, supply chain issues and new living arrangements, in response to which many families have had to start buying for more people or in larger quantities to get through. Fidelity Investments advises that adults accumulate three to six months of average monthly expenses to keep in reserve in case of emergency.
What can people do in the short-term?
There are some quick and immediate ways to adjust your budget. These include:
- Examine how much you make versus how much you spend, and adjust accordingly.
- Stash a small amount from each paycheck in a separate bank account from the one you use to pay bills.
- Sell material goods you no longer need, putting the money in savings.
- Pick up side jobs and devote the additional earnings to your savings.
- Allocate your next tax refund to savings, instead of spending it on a large household purchase or vacation trip.
Once you hit your emergency savings goal, it’s a good idea then to start a separate savings account for periodic, irregular or unexpected expenses that are not true emergencies. These may include vacations, unexpected car repairs, etc.
These are all good methods, but they are easier to carry out for some than others. For those who have difficulty implementing emergency savings on their own, employers can provide an important option.
How can employers help?
The better a worker’s financial wellness, the better an employee they can be. Employers have begun to consider providing employees with the opportunity to start emergency savings accounts (ESAs) through work. ESA contributions are taxed as ordinary income and the funds are immediately available, unlike other types of benefits accounts. The employee sets the amount and the money is automatically deducted post-tax from their paycheck and deposited. The employee does not have an opportunity to spend the money before it reaches the ESA, making it easier to build up the balance.
A recent study by the American Association of Retired Persons (AARP) showed that 71% of employees are interested in this type of benefit. And recent studies by groups such as Willis Towers Watson indicate that emergency savings accounts have rapidly become the most sought-after new benefit.
ESAs have not always been easy to implement, but the Consumer Finance Protection Bureau (CFPB) has changed that. In 2020, they issued a Compliance Assistance Statement of Terms template. The template can be used by employers to apply for approval from the Bureau to create an automatic savings account program. Also, the CFPB recently offered guidance on liability protection for employers who offer automatic enrollment of workers in these savings accounts.
What will encourage employees to adopt ESAs?
Even if employers offer an emergency savings plan, though, it may not resonate. Financial expert Suze Orman has been recommending emergency funds for over 40 years, for example, but finds that some people just won’t do it unless it’s automated.
Employees aren’t always educated in saving for the future, and younger ones may not see the value of a longer-term option like retirement accounts. By providing education, ease of implementation, and automation, employers can help give workers the motivational push they need.
To make ESAs even more beneficial and encourage participation, some employers are beginning to provide additional financial incentives like contribution matching and cash prizes.
How can providing ESAs help employers and employees alike?
In 2020, Devin Miller, CEO of Secure, a startup company focused on helping people save for emergencies, listed the benefits to employers from kick-starting employee emergency funds. These include:
- Increased productivity
- Showing a positive response to stressful times
- Relatively low costs and easy maintenance for these types of programs
- Attracting and retaining top talent
For more information on Emergency Savings Accounts
To learn more about providing emergency savings account options for your employees, consult your third-party benefits administrator, HR consultant, or legal counsel.
DataPath, Inc. is a leading provider of technology solutions for cloud-based benefits administration.