The numbers paint a bleak picture:

Almost half of all Americans would struggle to pay for an unexpected $250 expense, according to the October 2020 Marketplace-Edison Research Poll.

Nearly one in four Americans has no emergency savings, and another 26% have less than three months of savings, per a December 2020 report by the Life Insurance Marketing and Research Association (LIMRA).

Fifty-three percent of U.S. households have no emergency savings account, according to a 2019 analysis by the American Association of Retired Persons (AARP).

To pay for emergency expenses such as home repairs, medical bills or car repairs, many employees end up borrowing from their 401(k) or taking out high-interest loans. As a result, a growing number of employers are offering or considering emergency savings accounts (ESAs).

What are employer-sponsored ESAs?

Employer-sponsored ESAs encourage employees to save for emergencies by allowing them to put aside a portion of their pay for that purpose. According to a 2018 AARP report, “The ideal program would automatically enroll employees into a payroll-deduction rainy day savings account. The money could be used for anything from sudden health costs or unplanned car repairs to fixing a roof or traveling to visit a sick relative.”

How do employer-sponsored ESAs work?

They are funded similarly to traditional 401(k) contributions, except that the employee’s ESA contributions are taxed at the time of withholding and the money can be used for immediate financial needs. Although ESA contributions are not calculated pretax, there are no fees for withdrawing the funds.

When offering ESAs, employers can use an “in-plan” option, which is tied to the company’s existing retirement plan. For example, the employee might squirrel away 5% of their pay to go toward their ESA, which is attached to their 401(k).

Alternatively, employers can establish a stand-alone ESA program, which is separate from the company’s retirement plan. Stand-alone programs allow all employees to participate in the ESA program, regardless of whether they are enrolled in the retirement plan.

The employee’s ESA contributions are deposited into their ESA account, which is held by a bank or financial institution set up by the employer.

Before offering an ESA, employers must consider all variables, including:

Whether they will contribute to employees’ ESAs.
Whether employees’ contributions can be invested, like 401(k) funds.
Whether automatic enrollment in the ESA is the best course of action.
The potential impact of ESAs on the company’s retirement plan.
The most appropriate ESA vendor to use.

How interested are employees and employers in ESAs?

The emergency savings crisis is a long-standing issue that has been exacerbated by the COVID-19 pandemic.

Prior to the pandemic, 71% of employees “said they would be likely to participate in a payroll-deduction rainy day savings program if their employer offered one,” according to a 2018 AARP survey.

More recently, the December 2020 LIMRA report says that “almost two-thirds of employers are somewhat or very interested in providing ESAs.”

Despite heightened interest in employer-sponsored ESAs, the success of such a program comes down to whether employees have extra money to put aside and how well the employer implements the program.