Starting in 2024, employers can offer Emergency Savings Accounts (ESAs) linked to defined-contribution plans (e.g., 401(k)s). Employees can contribute up to $2,500 (or a lower employer-set cap) into these designated Roth accounts through payroll deductions. Withdrawals are tax-free and penalty-free, providing flexibility for unforeseen expenses like medical bills or car repairs.
Employers may also automatically enroll employees at a contribution rate capped at 3% of salary, with the option for employees to opt out or adjust their contributions. In this article, we explain that if you employer provides ESA option, you shouldn’t opt out under any circumstances, even if you have urgent need of cash.
Understanding Emergency Savings Accounts (ESA) and Their Relationship with 401(k)
An Emergency Savings Account (ESA) is a side account within your workplace retirement plan, typically linked to your 401(k). Employers introduced these accounts to help employees build emergency savings while still contributing to retirement.
Key ESA Features:
- Contribution Limits: ESAs usually have a cap, often around $2,500 to $10,000, depending on the employer.
- Tied to Your 401(k): Contributions to your ESA are counted together with your regular 401(k) contributions toward the annual contribution limit of $23,500 in 2025. This means that the total amount you contribute to both accounts combined cannot exceed this limit.
- After-Tax Contributions: Unlike traditional 401(k) contributions, ESA contributions are made after tax, so withdrawals are tax-free. ESA is a Roth account.
Employer Matches Still Apply
One of the biggest advantages of an ESA is that your employer’s 401(k) match still applies to your contributions—even though your ESA itself isn’t part of your long-term retirement fund.
Example:
- Your employer offers a dollar-for-dollar match up to 5% of your salary.
- You earn $60,000 per year.
- Normally, you’d have to contribute $3,000 to your 401(k) to get the full match.
- However, if your ESA is part of the plan, contributions to your ESA count toward earning the match.
This means you can strategically allocate funds to your ESA without sacrificing employer-matched retirement contributions.
NOTE: beware that the employer match goes into your regular 401(k) account, not to the ESA account.
Flexible Withdrawals: No Restrictions on How You Use Your ESA
Unlike a 401(k), your ESA funds are not locked away for retirement. You can withdraw money at any time, but most plans allow only one withdrawal per calendar month.
- No penalty for withdrawals.
- No restrictions on how you spend the money.
- Funds remain liquid and accessible, just like a regular bank savings account.
This makes an ESA an attractive alternative to a traditional savings account—with the added bonus of employer-matched contributions.
How to Maximize Your Employer Match While Keeping Cash Available
If you need immediate access to cash, you can still capture the employer match by contributing strategically. Here’s how:
- Contribute as much as possible to your ESA first to get the full employer match.
- Withdraw funds (once per month) as needed to your regular bank account for spending.
- Repeat monthly as necessary.
Example:
Let’s say you need $1,500 for upcoming expenses but still want to get your full 401(k) match:
- Instead of contributing directly to your 401(k), put $1,500 into your ESA first.
- Your employer provides a matching contribution into your 401(k).
- Withdraw the $1,500 from your ESA into your regular checking account to use as needed.
- You now have your cash available AND captured the free employer match in your retirement account.
The Bottom Line: Treating Your ESA Like a Regular Savings Account
An ESA functions like a regular savings account, providing easy access to your money. Meanwhile, you earn the employer match for free.