Using the Saver’s Tax Credit to Increase 403(b) Plan Participation

This article originally ran on December 15, 2014.

By Ellie Lowder

We have heard employers express concern about increasing participation in their 403(b) plans for two important reasons:

1) to permit employees to retire at normal retirement ages (which benefits the employer that replaces retiring employees with new hires at lower wages); and

2) to avoid the problem if the IRS, in an audit, determines that the employer is not providing meaningful opportunity to employees to participate or make contribution changes in the plan.

The IRS provides the following chart with more specific information on income levels eligible for the tax credit, which is based on adjusted gross income (note that the deferrals to the 403(b) plan do reduce that adjusted gross income and should mean that more are eligible for the credit or are eligible for a larger credit).

Employers should communicate with employees about the saver’s credit (ask the product providers, the financial advisors representing those providers and the third party administrator to help plan a good communication initiative) so that the population of low-income employees are motivated to take advantage of the ability to save for retirement in an affordable way!

Financial advisors should obtain IRS Form 8880 to be prepared to help employee calculate their own specific saver’s credit, and check with the payroll or human resources personnel to obtain the forms necessary to adjust withholding to reflect actual income taxes that will be owed.