Emergency funds are the bedrock upon which a good financial plan is built. Without this foundation, every emergency from the loss of employment to disability or death is a catastrophe which degrades the rest of the plan. Employers have an interest in the financial stability of their employees. Many employers seem unaware that the SECURE Act 2.0 gave them tools to help.
Emergency Funds
Let’s start with a refresher on the purpose and use of Emergency Funds. The opening minutes of the movie “Up” show what happens without a proper emergency fund … other savings are depleted while handling life events. Every tree that falls on or near the house and a host of other problems require us to break the jar of our future dreams. We won’t reach the Paradise Falls of retirement or leave a legacy for our heirs if we rely on our long-term accounts to stay afloat.
Generally, single-income families should have 6-12 months of expenses in cash savings to meet emergencies. Joint-income families should have 3-6 months. This level of cash savings helps to keep the family afloat during times of upheaval. Most importantly, these funds give some breathing room while seeking new employment.
Without these funds, the first place people usually look is taking loans against other assets. There are loans against the equity of a home in the form of a Home Equity Line of Credit (HELOC), loans against the value of a brokerage account in the form of a margin account, or even loans against 401(k) assets. The problem with each of these is the fact that additions to these accounts go toward paying back the loan rather than building wealth and the longer it takes, the more it will cost in interest.
If taking a loan isn’t an option, many will take withdrawals from retirement assets or education funds for the kids. Not only will this increase the financial stress through additional taxable income, it also generally comes with additional penalties for not complying with the requirements of the account type.
In short, the Emergency Fund allows the rest of the financial plan to function during times of stress and uncertainty.
Emergency Funds and the 401(k)
The SECURE Act 2.0 signed in 2022 authorized employers to link emergency savings accounts to 401(k) plans—technically called Pension-Linked Emergency Savings Accounts—and to allow emergency withdrawals of $1,000. Surveys show that only 4% of employers actually allow the emergency withdrawals and an even smaller number have linked emergency savings accounts.
This doesn’t mean that employers aren’t contributing to emergency savings accounts, though. Many employers have partnered with banks to provide FDIC-insured accounts external to the 401(k).
Contributions to these accounts count toward the 401(k) limit—$24,500 in 2026 with additional “catch-up” amounts for investors aged 50 or older. Since these funds are meant to help in an emergency, contributions are made on an after-tax basis (similar to Roth contributions) so there are no tax consequences to withdrawals. The maximum contribution to the emergency savings account is $2,600 in 2026—and it increases with inflation.
One challenge for employers and plan recordkeepers is the fact that those earning $160,000 or more are not permitted to participate. This can be an administrative issue as incomes fluctuate.
Why
Why should this matter to employers? Desperate employees may be tempted to cause harm for personal gain. Companies maintain proprietary secrets, customer lists, personal identity information (PII), and other lucrative data. Employment is a matter of mutual trust. Helping employees through difficult moments can be protective to the business as well.
Recent legislation has changed the retirement and estate planning landscape in many ways. Discuss these changes with your CPA, attorney, and HR professionals to ensure you are aware how these changes may affect you, your business, and your employees.
