Helping employees understand the retirement savings contributions credit
Tax time is here and with it comes the perfect opportunity for employers to inform workers about a little-known tax credit they may be eligible to claim that could put $1,000 to $2,000 back in their pockets.
The Saver’s Credit or Retirement Savings Contributions Credit is offered to low- to moderate-income workers who put money away in a workplace-sponsored 401(k), 403(b) or IRA, but according to the 16th Annual Transamerica Retirement Survey, only 25% of American workers with annual household incomes of $50,000 or less are even aware of the credit.
“One of the pitfalls is that the Saver’s Credit is not on the 1040EZ form,” says Catherine Collinson, president of the Transamerica Center for Retirement Studies. “There is a reference to it in the instructions but it is not on the form itself.”
The Saver’s Credit is a “tax credit above and beyond the advantage of tax-deferred savings when contributing to a 401(k), 403(b), or IRA. Because this double benefit sounds too good to be true, many eligible savers may be actually confusing the two incentives,” she adds.
So who can get this credit? Anyone over the age of 18 who has contributed to a retirement savings account during the past year and meets the adjusted gross income requirements is eligible. Single filers with an adjusted gross income of up to $30,500 in 2015 and $30,750 in 2016 are eligible to apply for the credit. For a head of household, the AGI limit is $45,750 in 2015 and $46,125 in 2016. For married couples who file a joint return, the AGI limit is $61,000 in 2015 or $61,500 in 2016.
Individuals can’t be full-time students or be claimed as a dependent on someone else’s tax return.
“Employers can play a huge role in promoting the Saver’s Credit,” says Collinson.
Transamerica has flyers on its website that employers can print out and hang up in break rooms and distribute to their workers. The organization also created a canned newsletter article employers can put in employee newsletters or copy and paste into emails. A fact sheet is also available giving workers all the information they need to claim the tax credit. Many of these materials are in both English and Spanish.
“Nothing is routine about benefits communications.”
To claim the credit, people need to use the long form 1040. To make it easier for them to do that, the IRS offers a free file tax program on IRS.gov for anyone who makes $62,000 a year or less.
About 70% of Americans are eligible to use the free file tax program. Almost all people who are eligible for the Saver’s Credit are also eligible for the free tax filing software program, she says. That makes it even easier to claim the credit because these programs automatically populate the Form 8880 that is required to claim the tax credit.
“Nothing is routine about benefits communications, but if employers are implementing communications programs to their workforce, especially during tax season, let them know via email or posters in the break room to heighten the awareness,” she says.
All employees should receive this information whether they are eligible for the credit or not.
“We all know that compensation is a touchy topic. You don’t want to target a specific group because they don’t meet the requirement,” Collinson says. “It is best to let everyone know about it. If they personally meet the requirement, they know about it. Chances are they have a friend or loved one who is eligible.”