Emergency Savings Accounts: The New Employee Benefit

40% of Americans, many of them with full-time jobs,  can’t afford $400 for an unexpected expense.^[1]

The anticipation of having to pay for unplanned expenses causes stress for employees, leading to loss of productivity at work. One study from the Society of Human Resources Management found that employees could lose up to 12 hours of productivity per month if they’re distracted by money issues. That’s enough to make employers take notice.

In response, a growing number of businesses are offering a new benefit called employer-sponsored emergency savings accounts. These accounts help employees save to cover unplanned expenses such as car repairs, home repairs, medical bills, and more.

And big companies like UPS, with 90,000 employees, hope this new benefit will help their bottom line. But as an employee, would it really help yours?

What is an emergency savings account, and how is it different from other accounts?

Employer-sponsored emergency savings accounts are designed to help employees save for unplanned expenses. They are sometimes referred to as ESAs, although this can be confusing given that ESA also stands for an Education Savings Account that you get through the Coverdell program.

Emergency savings accounts, like 401Ks, are deducted from your paycheck. But they act more like a regular savings account.

Emergency savings accounts are set up so that:

• The funds aren’t used for ordinary day-to-day expenses.
• Your everyday savings and long-term investments aren’t used.
• You have a cushion to rely upon for unplanned expenses.
• You do not need to finance emergency spending.

Emergency saving accounts vs. 401Ks

Similar to a 401k, employer-sponsored emergency savings accounts are deducted from your paycheck and may be invested. But, ESA’s don’t offer a pre-tax benefit – unlike your 401(k), taxes will be deducted before the contribution to your emergency savings account.

A few ESA’s are part of 401(k) plans. These are called sidecar accounts, and they offer a big advantage because it means the money you save for emergencies would also grow like an investment. However, they are not as common.

Emergency saving accounts vs. regular savings accounts

Emergency saving accounts are different from traditional savings accounts in that they are only to be used for unexpected expenses. Having an emergency savings account means that your other financial goals aren’t stopped when unexpected expenses occur.

How employer-sponsored emergency savings accounts work

Right now, there is no one set way for employers to offer emergency savings accounts. Some emergency saving accounts are part of Roth IRAs and subject to IRS rules, while – on the simpler side – others deduct from your paycheck and deposit directly into a savings account. But this is how they generally work:

1. The employee is given an overview of the plan during their benefits enrollment period at work.
2. The employee can elect to set up the account and set a limit for how much they want to save. In some cases, a signup bonus may be offered when the employee signs up.
3. Then they set up a set amount they want to contribute each paycheck.. The employer may match some or all of the funds or offer some type of reward program for making contributions.
4. The account grows in value over time.
5. If there is an emergency, the employee can take out the money they need immediately or the same day.
6. After the account grows to a certain level, the employee can decide if they wish to increase the limit on the account, add those contributions to their 401K, or the money for some other purpose.

Examples of employer-sponsored ESAs

Suntrust

Suntrust banks offer workers a $1,000 incentive, as long as they contribute at least $20 per paycheck and complete a financial education program. 53% of employees were approved for the incentive. New hires who took the course and were part of the program had a 90% retention rate. Suntrust also manages this benefit with other companies that use its banking services so those companies can provide emergency savings accounts directly to their employees as a benefit.^[2]

Levi’s

Levi Strauss offers its hourly employees $240 if they contribute to an emergency savings account with the company and stay with it for six months. About 32% of their employees joined and have an average of $700 in savings.^[2]

KFC

The KFC Foundation (a nonprofit funded by KFC corporate and franchise owners) matches employees of KFC that contribute at least $500 in their emergency savings accounts. The foundation also uses gamification as a means of motivating employees. Employees of both corporate and franchisee restaurants can sign up to get an initial $20 bonus. Then as long as they save at least $10 per month, they get a direct dollar match of the amount they contribute every month. The foundation will match up to $40 per month over a six-month timeframe.^[3]

BestBuy

BestBuy offers an emergency savings fund program with an initial five-dollar deposit into the employee account, and after a few financial education courses, employees receive a $100 deposit. They also get entered into a drawing to win a $250 deposit into their accounts. Additionally, employees can obtain a loan of up to $1,000 without a credit check and with 12 monthly payments.^[4]

Alcoria

Alcoria, a worldwide customer service provider, offers a program similar to the one provided by the KFC foundation with a $20 bonus and matching employer contributions of $40 per month. Employees can save $240 over six months and, with the employer contributions, wind up with $500 after six months. This helps workers get a balance of $500 in their accounts much quicker than if employees started their emergency saving accounts.^[4]

The problem that emergency savings accounts attempt to solve

Many Americans live paycheck to paycheck, and even the slightest unexpected expense leads to credit card debt.  

How employer-based emergency savings accounts can help

Emergency savings accounts can cover “life happens” emergencies instead of going into debt, using long-term savings, or dipping into retirement funds.

Employees who don’t save for emergencies are 13 times more likely to withdraw funds from retirement accounts. ^[5]

You can set up an emergency savings account on your own, but if your employer offers one, it may offer some benefits you can’t get on your own.

Signup bonuses and matching offer a way to get free money to add to your account. Either way, having a separate account for true emergencies can help you avoid spending money on other things and get you out of the cycle of living paycheck to paycheck.

What to look for if your employer offers an emergency savings account

1. Transparency – The terms of the ESA must be simple to understand.
2. Low fees – Because the amounts are so small, fees (if any) must also be relatively small.
3. Guaranteed savings – The contributions you make cannot lose value.
4. Transferability – Like with 401K accounts, ESAs need to be easily transferred to a private account should you leave the company that offers it.
5. Easy access – The funds must be available the same day to cover unexpected emergencies.
6. Automatic features – Automatic deductions means you won’t forget.
7. Matching – Ideally, your employer should match some or part of your contributions.

Setting up automatic savings if your employer doesn’t offer it

If your employer doesn’t have the benefit option to start an emergency savings account, you can start one of your own.

Start saving today

You can check with your bank or credit union to see what types of savings accounts they offer. Also, compare these to other accounts you can find online through comparison services like Bankrate.

You want to look for an account that offers the best growth with requirements you can easily meet. The savings accounts with the highest interest rates will have things like minimum balance requirements. Only get these accounts if you are confident you can meet those requirements. Otherwise, you will face added fees.

The more you automate the process, the easier it will be. You can ask your HR department to put part of your direct deposit into the savings account. Or you can set up an automatic transfer.

Another option you may want to explore is to use apps that will allow you to invest the money you save while still providing easy transfers when you need funds. For example, spare change apps like Qapital and Acorns round up purchases on linked accounts to the nearest dollar and then invest the money in your account.

How much should you save?

Many financial advisors say that you should have three to six months of budgeted expenses in emergency savings. But for new savers, this can be a discouraging amount. Instead, set smaller realistic goals to fit your budget. Over time, as long as you continue to contribute, your money will grow.

One goalpost to consider is $1,000. With just one thousand dollars in your bank account, you can cover most emergency repairs.

Even a modest amount is an excellent goal to start. At just $25 per week saved up, you’ll have $1,300 saved up in one year.

Make sure your emergency fund is for real emergencies

An advantage of a separate saving account for your emergency fund is that it gets used for the right purpose.

The money in emergency savings isn’t for fun things. It’s not for gifts, holidays, or sales, or anything other than emergencies. You have to be strong in your will to avoid spending the money on big-ticket purchases. Even good uses of regular savings, such as saving up for the down payment on a car, aren’t a good use of your emergency fund.

If you have a spouse or significant other, you should agree on an “emergency.”

Extra income

If you get a raise, a bonus, or start a side-gig, use some of that money to increase your emergency savings account.