The Saver's Credit - Millions Lost by Low-Income Participants

Other than me, only one other person in a room with more than 100 conference attendees raised their hand when asked how many of us were communicating the availability of the Saver’s Credit to our 401(k) participants. 

Where’s recognition of the Saver’s Credit, the tax credit for low- and moderate-income 401(k) savers? I am dismayed that a program potentially benefitting as many as one-third of people who contribute to 401(k) plans is not described in 401(k) communications. I am especially concerned that this program is not being communicated to particpants who are automatically enrolled in their 401(k) plans. The sacrifice from saving for retirement is more keenly felt by those at lower incomes. We should do everything we can to ameliorate that pain. Informing them that plan contributions can reduce a low-income 401(k) saver’s Federal income tax is an easy way to help.    

For those unaware of the program here are the specifics:

In order to qualify for a special tax credit of up to $1,000 someone must be:

• 18 years of age or older
• Not a full-time student
• Not claimed as a dependent on someone else’s return 

In addition, they must meet one of the following financial criteria:

• File their taxes individually with an income of $28,250 (indexed) or less
• File their taxes as head of household and have an income of $42,375 (indexed) or less
• File their taxes jointly with an income of $56,500 (indexed) or less 

The tax credit ranges from 10 to 50 percent of each $1.00 contributed, up to the first $2,000 contributed to a 401(k) or an IRA. That’s between $200 and $1,000 directly off the income taxes they pay. If someone and their spouse both contribute to a 401(k) plan or IRA, they may both be eligible to receive a credit. The amount of the tax credit depends on the amount of the adjusted gross income and is phased out as the person’s income increases. The tax credit is in addition to other favorable tax treatment for 401(k) participation, such as the deferral of income tax on contributions. It should be noted note that this credit applies only as a reduction to the income tax liability, not as cash in hand via a refund.

Plan sponsors are constantly looking for ways to improve their 401(k) programs, especially ways that don’t hit the sponsor’s bottom line. Communicating the Saver’s Credit is a win-win. At virtually no cost, it can help increase savings by lower-paid employees, and those who benefit will appreciate those who showed them the way.