By Jane Meacham, Contributing Editor

A retirement research institute suggested several ways to improve the Saver’s Credit for lower-income individuals in a recent paper, steps that also could help employer plan sponsors ensure that their plans remain in compliance with nondiscrimination requirements.

The so-called Saver’s Credit has been “woefully underutilized” since its inception as part of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, a September report by the nonprofit National Institute on Retirement Security (NIRS) said of improving the tax credit’s use.

The report disclosed that only between 3.25% and 5.33% of eligible filers claimed the credit between 2006 to 2014, with an average credit valued at between $156 to $174 in that time period. About 8 million taxpayers filed for the credit in 2014, the last year for which data is available, although many more are eligible to do so, the NIRS said. The institute cited a general lack of awareness of the credit among taxpayers, along with tax-filing complexities and lack of access to employer retirement savings accounts as reasons for the low uptake.

Why It Was Created

The Saver’s Credit was created by Congress as a tax credit available to low- and moderate-income taxpayers who contribute to a retirement savings plan. But, according to the NIRS, the credit hasn’t achieved its goal because of the way it’s structured and administered. One of the hurdles that plan sponsors could help ease is the fact that many who are eligible lack access to retirement accounts with payroll deduction at work.

“Improving the Saver’s Credit and making it easier to claim, along with increasing access to retirement savings accounts, could greatly increase the retirement security for many low- to moderate-income households,” the NIRS said in the paper.

Specifically, taxpayers with yearly incomes of less than $31,000 as single filers and $62,000 for married filers in 2017 can claim a credit of up to $1,000 for contributions to a qualified retirement plan or individual retirement account (IRA), if they have a tax liability.

The Saver’s Credit gives taxpayers who fall within its income limits tax credits equal to 50%, 20%, or 10% on up to $2,000 of the amount individuals saved in a qualified plan. The credit is adjusted using three levels of “cliff” income limits based on exact-dollar income.

The NIRS is in favor of replacing the tiered income limits with one level that is phased out gradually, as well as increasing the income limits so that more people would be eligible for the Saver’s Credit.

Among the series of changes suggested by the NIRS is a restructuring of the tax credit into a federal match similar to the matching contribution many employers offer in their retirement plans.

The most aggressive option for reform that the NIRS puts forth in the paper involves replacing the existing Saver’s Credit with a savings match from the federal government. Eligible savers would receive a match equal to 50% of the amount they contributed during the tax year. It would be claimed through their tax return and would go directly into their retirement savings account.

The institute said recent technological advances make the match feasible for both plan sponsors and participants. “Today, very few retirement accounts carry routing numbers that would make direct deposit of a match possible; however, implementation of a match would spur such a change,” the institute said.

In the interim, the U.S. Treasury Department can send plan providers a single wire transfer containing the match amount for many or all of their eligible customers’ accounts along with a memo with information on which account numbers should receive a match and how much each is due, the NIRS continued.

The government match would be invested the same way as the rest of the account, with earnings on the match also being ineligible for early withdrawal. Similarly, the NIRS said, recordkeepers are now able to subdivide retirement accounts, which would make it possible for them to keep a separate record of federal matches received and to prevent those funds from being accessed before the account owner reaches a specified retirement age.

Tips for Plan Sponsors, Administrators

Although the Saver’s Credit is designed to minimize employer involvement, plan administrators should keep in mind that:

• Employee deferrals and contributions to a 401(k) plan can be taken into account in nondiscrimination tests, even if those contributions give rise to the Saver’s Credit;
• Employers are not required to tell their employees about the credit, and will not need to use a specific form if they choose to give employees notice of it;
• Contributions and deferrals through an automatic enrollment arrangement are eligible for the Saver’s Credit; and
• Projected Saver’s Credits can be taken into account in calculating the allowable number of withholding allowances on Forms W-4.