What Is an Emergency Savings Account (ESA)?

Quick Answer

An employer-sponsored emergency savings account (ESA) helps workers save for financial emergencies by automatically deducting an amount from each paycheck and depositing it into a separate account. If you need to cover a bill or cash gets tight, you can draw from this fund to bridge a financial gap.

A pink piggy bank sits on the table next to a calculator and coins with a person taking notes in the background.

Experts recommend having enough rainy day savings to cover three to six months' worth of living expenses. If your savings falls short, however, you're not alone. Nearly a quarter (24%) of consumers have no emergency savings at all, according to a report by the Consumer Financial Protection Bureau, and 39% have less than a month of income socked away.

The good news is that saving consistently—even if it's a small amount—can bridge the gap over time, and employers that offer an emergency savings account (ESA) may be able to help you meet your savings goals faster.

An employer-sponsored ESA is a workplace plan that deducts money from your paycheck to create an emergency fund; in some cases, employers will also match your contributions. Read on to learn how ESAs work, how to use an ESA account and the pros and cons to consider before opening one up.

How Does an Emergency Savings Account Work?

ESAs may be part of an employer's retirement benefits package or a completely separate account set up at another financial institution.

While ESA programs sponsored by employers can work similarly to 401(k) accounts, there are also some key differences, specifically related to how taxes are handled.

Here's an overview of how ESAs work:

Contributions Are Deducted From Your Paycheck

Like contributions to a 401(k), you can have money automatically deducted from your paycheck and deposited into your ESA. Automating your contributions can make saving less cumbersome since you won't have to remember to set aside money each paycheck.

Employers May Match Contributions

In some cases, your employer may match the money you contribute with contributions of their own, which could help grow your balance faster. However, an employer match isn't guaranteed, and eligibility requirements and enrollment options can vary by plan.

Different Providers Manage the Savings Accounts

Employers often partner with different financial institutions, nonprofits and fintech companies to provide emergency savings programs.

Depending on the plan, you may get access to financial education materials, and automated savings may be put into an interest-bearing account or invested similarly to the funds in your 401(k).

If money is deposited into an interest-bearing account backed by the Federal Deposit Insurance Corporation (FDIC), your savings is guaranteed up to $250,000.

Savings Contributions Are Made From After-Tax Income

Money is contributed to an ESA from your paycheck after tax.

If the savings is part of a retirement plan, you might have to pay tax and a tax penalty on account earnings (not contributions) withdrawn before age 59½.

It may also take longer to withdraw money from an emergency account that's part of your retirement plan. For ESAs set up in a separate account, you likely don't have to worry about a withdrawal penalty and you could access your money faster.

How Can You Use an Emergency Savings Account?

The process of making withdrawals from an ESA depends on the program terms. In some cases, you may get a debit card to use whenever you need funds. So, if your car breaks down or you're short on money for bills one month, you could quickly tap into your ESA to cover the gap.

One factor to keep in mind is that the amount you can contribute to an ESA may be limited to a certain percentage of each paycheck, which could make it less ideal for a sinking fund if you're trying to save quickly for a major expense.

For example, savings for a car, appliances or a home improvement project could be better off in a separate high-yield savings account that gives you more flexibility and control to save what you need. Like your 401(k), money you have contributed to the emergency fund should go with you when you leave the employer.

Pros and Cons of Emergency Savings Accounts

Thinking about opening an ESA? Here are the pros and cons to consider first:

Pros Cons
Automatic withdrawals from your paycheck make funding your ESA simple Not all employers offer ESA plans
Savings plans may include other perks, like financial literacy education and savings tools ESA plans attached to retirement plans may come with tax implications
Savings in investment or interest-bearing accounts may earn a return ESA accounts may have limits on what you can contribute to the account
Employer contributions could help your savings grow faster Not all employers offer a savings contribution match

Is an ESA Right for You?

Whether an ESA is right for you comes down to your goals and savings habits. Here are some scenarios where using an ESA could make sense:

  • You could use some help growing your emergency savings.
  • You're comfortable with the idea of savings being deducted directly from your paycheck.
  • Your employer offers an ESA plan where withdrawals are easy to make on short notice.
  • The interest rates and investment opportunities offered by your company's ESA are competitive and make sense for your financial plan.

If your employer doesn't offer an ESA account, you could create a similar savings strategy on your own by choosing to automatically allocate a percentage of your direct deposit to a savings account each pay period.

You could also set up a reminder to transfer money from checking to savings each time you get paid or try a budgeting app. ESAs are just one of many options you could explore when you need help growing savings for a rainy day.

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