Emergency Savings Plans (ESP)
Companies are always looking for the best use of their dollars to attract, retain and motivate employees. This article suggests a remarkable—and yet, relatively unknown—strategy. First, let’s look at financial challenges from an employee’s point of view:
Emergencies
Most cases of bankruptcy aren’t caused by reckless spending but by financial hardship, and many affect lower-income households that simply can’t afford to deal with unexpected major expenses such as job loss or medical bills. Some 40% of Americans would struggle to come up with $400 for an unexpected expense. We need what you might call Emergency Sensory Perception (ESP) to respond to unexpected expenses.
Paycheck to paycheck
Dave Ramsey recently said that 78% of Americans live paycheck to paycheck. He also said that we should build a fully funded emergency fund that covers 3–6 months of our expenses. This fund is to protect us against life’s bigger surprises, like the loss of a job or a car breaking down. In addition to his overall message of becoming debt free, he cites specific steps to ease the burden of medical debt.
The Research
FEMA (Federal Emergency Management Agency) aims to support citizens and first responders as we work together to prepare for, protect against, respond to, recover from, and mitigate hazards. Dr. Howard Kunreuther’s presentation “Human Biases: Why People Underprepare for Disasters,” suggests that most preparedness errors in disasters can be traced to the harmful effects of six biases: myopia, amnesia, optimism, inertia, simplification, and herding. In general terms, he recommends we get good insurance coverage, don’t let it lapse, focus on the consequences of events (not just probabilities), and create a social norm of being prepared.
The Puzzle
If you are living paycheck to paycheck, how do you build an emergency fund? In Los Angeles County, where the living wage for a single person with no children is $14.83 per hour, a person needs $30,856 annual income before taxes.
At $15.00 per hour, an employee will make $31,200 before taxes. With $30,856 needed for food, medical care, housing, transportation, other expenses, and taxes, that leaves $344 surplus for the year. $6.62 extra each week. An emergency fund of 3-6 months ($7,000 – $14,000) is impossible to achieve without some extraordinary measures.
Conventional measures include increasing income (by working overtime, taking a second job, or increasing skills), cutting expenses, using payday loans, accessing checking account overdrafts, and putting purchases on credit cards. These cost-inefficient methods make financial resilience and self-reliance less likely—and add burdens to an already overburdened back.
Employers
According to the Bureau of Labor Statistics, healthcare employers devote an average of 52 percent of their total business expense to payroll. For-profit service companies’ share is about 50 percent. Durable goods manufacturers spend 22 percent and retail and wholesale trades about 18 percent on payroll.
ESP
Extrasensory Perception isn’t needed to benefit employees. We can create another type of ESP: Emergency Savings Plans, which offer a practical strategy to prepare for emergencies. Steadily saving money designated for emergencies will prepare people for unexpected future emergencies. Like Dave Ramsey says, finances are 80% behavior and 20% head knowledge. It is time to create a habit of preparing for the unknown.
Recommendation
Employers can help their employees prepare for emergencies. Prior to implementing a plan, a company should get legal, financial and, most importantly, human resources advice. The HR leader should spearhead the development and implementation of the plan, ensuring input from appropriate stakeholders,
Emergency Savings Plan Policy Sample
Plan Purpose
The XYZ Corporation Emergency Savings Plan provides a means for employees to save money for potential emergencies or extraordinary expenses. An ESP account will be established for all employees (full-time, part-time, exempt and non-exempt).
Funding
The company will contribute $X.XX per hour worked for each non-exempt employee. For exempt employees, the company will contribute 40 x $X.XX per week. The company may make additional contributions on an ad hoc basis at its sole discretion.
Employees may contribute to the fund through payroll deduction or by check. Employee contributions to the plan are available to the employee at any time for any purpose. Employees may request a withdrawal of all or any portion of their contributions by completing an ESP Withdrawal Request form.
Administration
The plan will be administered by the administrator, comprised of the company’s CEO, CFO, and HR Leader. Subject to the provisions of this policy, the administrator shall have the authority, in its discretion, to:
- Determine the terms and conditions, not inconsistent with the terms of this plan;
- Construe, interpret and administer this plan as necessary to comply with any regulatory, legal, and accounting requirements;
- Prescribe, amend, and rescind rules, regulations, and guidelines relating to this plan; and
- Make all other determinations deemed necessary or advisable for administering this plan.
Regulatory Compliance
The ESP is not an ERISA qualified plan.
Plan Withdrawals
Employees may request a withdrawal of employer contributions from the plan at any time and in any amount up to the total amount in the employee’s account. To request a withdrawal, an employee must complete an ESP Withdrawal Request form and submit to the plan administrator. The reason for the withdrawal request must be indicated on the form and copies of invoices or expense receipts must be attached.
The administrator will review the request to ensure it complies with the rules of the plan. Upon approval by the administrator, accounting staff will prepare a check for the employee.
Plan Transfers
An employee may request that a specific amount of his/her account balance be transferred to another employee who participates in the plan.
Taxes
Company contributions to the ESP will be reported on the employee’s paycheck and on the W-2 Wage and Tax Statement. Withdrawals from the plan are not subject to taxes.
Recordkeeping
The Company will maintain a record of all contributions and withdrawals and will provide a copy to employees on a monthly basis or with each payroll.
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No one has ever become poor by giving.
― Anne Frank, diary of Anne Frank: the play
No one is useless in this world who lightens the burdens of another.
― Charles Dickens
When we give cheerfully and accept gratefully, everyone is blessed.
― Maya Angelou
The purpose of life is not to be happy. It is to be useful, to be honorable, to be compassionate, to have it make some difference that you have lived and lived well.
― Ralph Waldo Emerson
The best way to not feel hopeless is to get up and do something. Don’t wait for good things to happen to you. If you go out and make some good things happen, you will fill the world with hope; you will fill yourself with hope.
― Barack Obama
The best antidote I know for worry is work. The best cure for weariness is the challenge of helping someone who is even more tired. One of the great ironies of life is this: He or she who serves almost always benefits more than he or she who is served.
― Gordon B. Hinckley
Non nobis solum nati sumus. (Not for ourselves alone are we born.)
― Marcus Tullius Cicero
I don’t want to live in the kind of world where we don’t look out for each other. Not just the people that are close to us, but anybody who needs a helping hand. I can’t change the way anybody else thinks, or what they choose to do, but I can do my bit.
― Charles de Lint
If you’re not making someone else’s life better, then you’re wasting your time. Your life will become better by making other lives better.
― Will Smith
