Saver’s Credit: A Valuable Tool For Boosting Low-Income Employees’ Retirement Plan Participation

September 2019

By Ellyn Bess and Beth Garner

Plan sponsors often struggle to get lower-paid employees to participate in the company 401(k) plan. For years, a little-known law has been in place to give tax credits to low-income employees to help them save for retirement.
 
It’s called the Saver’s Credit, and when used, it can lower federal income taxes for single and joint filers. According to the Transamerica Center for Retirement Studies, only 38 percent of employees know that the credit exists. This presents a great opportunity for plan sponsors to create an education campaign to boost participation and savings rates—and encourage lower-income employees to prepare for retirement.
 

Who Qualifies for the Saver’s Credit?

Employees who are at least 18 years of age and contribute to an employer-sponsored retirement plan—such as a 401(k), 403(b) or government-sponsored 457(b) plan—or have an individual retirement account (IRA) and meet the income requirements are qualified. In addition, designated beneficiaries who contribute to Achieving a Better Life Experience (ABLE) accounts also may qualify. The income requirements for all accounts are: 
  • Single tax filers with an Adjusted Gross Income (AGI) of up to $32,000 in 2019
  • Head of household filers whose AGI is $48,000 in 2019
  • Married, joint return filers with an AGI of up to $64,000 in 2019
 In addition, Saver’s Credit candidates cannot be full-time students, nor can they be claimed as a dependent on someone else’s tax return. Also, rollover contributions are not eligible for the Saver’s Credit.
 

How Is the Credit Calculated?

How the Saver’s Credit encourages employees to participate in or contribute more to their retirement plan lies in how the credit is calculated. The amount employees will be credited on their tax return depends on their income level and the size of the contributions they make to their plan. In 2019, the maximum retirement contribution that can be considered for the credit calculation is $2,000 for single filers and $4,000 if married filing jointly.
 
Depending upon income level, employees can receive a credit equal to 10%, 20% or 50% of the size of their retirement contribution—the higher the employee’s income, the lower the percentage. Single tax filers with an AGI of $15,000, for example, would be eligible for a credit equal to 50% of their contribution, but single filers with an AGI of $25,000 would be eligible for a credit of only 10%. The table to help filers calculate their credit can be found on the Internal Revenue Service (IRS) Saver’s Credit website.
 

How Is the Credit Claimed?

Employees can claim their Saver’s Credit when they file their annual income taxes. It’s important to point out that this isn’t a deduction that reduces the amount taxed; instead, it’s a dollar-for-dollar reduction in what is owed to the IRS. It’s also important to note that the credit is non-refundable, meaning that it can’t reduce the taxpayer’s liability to less than $0.
 
Saver’s Credit filers are also eligible to have someone file their taxes for free using the IRS’ Free File program if they have an AGI of $66,000 or less. Even if employees don’t qualify for Saver’s Credit, the IRS offered the Free File program in 2019 for low-income workers and a “light” version for those above the $66,000 AGI. Filers can also use the service to get extensions on their tax filing.
 

BDO Insight: Opportunity For Plan Sponsors

Employees not taking advantage of matching contributions is a common frustration for plan sponsors that are focused on their employees’ financial well-being. It can be similarly frustrating when eligible employees pass up the Saver’s Credit, which is another form of free money. Teaching employees about this tool can be a great way to boost participation and savings rates.
 
This credit can be a little more complicated than a matching credit, so plan sponsors have an opportunity to educate employees about this benefit. Additionally, plan sponsors can also help by letting employees know about the free tax preparation services the IRS has for low- to middle-income filers.
 
Understanding the nuances of the Saver’s Credit can be complicated for plan sponsors as well. Your BDO representative can walk you through the qualifications, calculations and other necessary steps to make sure you are providing the best information to your employees.