In a 2017 survey, 78% of U.S. workers said they were living paycheck to paycheck to make ends meet.

More recently, in a 2020 survey, 34.2% of U.S. workers said it would be very difficult to meet their current financial obligations if their paycheck were delayed for one week, while 34.5% said it would be somewhat difficult.

Further, 40% of U.S. households “say they would struggle to cover a $400 emergency expense like a medical bill or car repair,” according to the American Association of Retired Persons (AARP).

To pay for emergency expenses, some employees end up tapping into their 401(k) or their long-term savings accounts — which defeats the purpose of these accounts.

Consequently, a growing number of employers are offering payroll-deduction emergency savings accounts (ESAs).

How ESA Programs Work

Also called “rainy-day accounts” or “sidecar accounts,” emergency savings accounts allow employees to set aside money that they can later use for emergency purposes.

The employee allocates the amount they want deducted from their paychecks. Then, each pay period, the employer deducts the amount (on an after-tax basis) from the employee’s wages. This amount goes into the employee’s emergency savings account.

Employees can withdraw ESA funds (penalty free) whenever they want, using a debit-like payroll card or by making an electronic transfer. They can manage their card account online or by phone or mobile application.

Benefits of ESAs

According to the AARP, emergency savings accounts can help employees establish financial security by:

  • Frequently replenishing savings
  • Promoting financial wellness and peace of mind
  • Increasing productivity at work
  • Allowing employees to maintain their credit and long-term savings

ESAs can be a feasible option for employers that do not offer retirement savings plans, and “can be available to the 14 million Americans who do not have personal bank accounts,” says the AARP. Further, the program costs “employers very little to setup and administer. They are also easy to explain and simple for employees to use.”

ESA funds are protected by an FDIC-insured bank or an NCUA credit union.

Employer Matches and Program Participation

The AARP advises employers with ESA programs to utilize “automatic enrollment,” as this feature can greatly improve employee participation. Employees can opt out of the program or change their payroll deduction amount at any time.

While automatic enrollment can encourage higher levels of participation, employees are even more likely to participate if their employer makes a matching contribution. In an AARP study, 71% of surveyed employees said they would likely enroll in a payroll-deduction ESA — compared to 87% who said they would likely participate if their employer offered to match their contributions.

The employer’s ESA contribution does not have to be a substantial amount. As stated in an article published by SHRM, “An organization with a limited budget can get employees' attention with a relatively nominal amount, such as a one-time contribution of $100.”

The AARP study found that the top drivers of ESA participation include:

  • Not having enough retirement savings
  • Stress about overall financial situation
  • Trust in the employer — meaning the more employees trust their employer, the more likely they are to enroll in the program

Employee participation also hinges on whether the program is successfully designed, with as few restrictions as possible. For example, employees want immediate access to their ESA funds; they do not want their employers telling them when they can or cannot withdraw their money.

Per the AARP study, employees also want to:

  • Start or stop contributing to their ESA as they see fit
  • Choose the financial institution that their contributions should be deposited into
  • Maintain their privacy
  • Keep their ESA if they leave their employer

Employers interested in offering ESAs may want to ensure that they have a need for the program before proceeding. They can, for example, conduct a company-wide survey to determine the primary source of stress among their employees. If it’s money, investing in an ESA program may be a solution.

If the ESA program is well constructed, it can help increase employee productivity, lower turnover, and prevent early withdrawals from 401(k) accounts.