More awareness, bigger tax relief sought for saver's credit

Lawmakers are doubling down on efforts to persuade low- and middle-income workers who contribute to retirement savings accounts to take advantage of the saver's tax credit.

Provisions tucked in the Securing a Strong Retirement Act of 2022, or SECURE 2.0, which passed overwhelmingly in the House in March, not only make the saver's credit more generous and widely available but also direct the secretary of the Treasury to come up with a plan to promote the incentive.

If the legislation passes, the Treasury secretary will have to provide Congress with a report summarizing the department's anticipated promotional efforts within 90 days of the bill's enactment. The legislation specifically asks for plans involving digital and print materials and their translation into the 10 most commonly spoken languages outside of English. The Senate is expected to introduce its own version of the bill later this year.

The added measure to promote the credit will help make a difference in raising awareness of the largely unknown credit, said Catherine Collinson, the Los Angeles-based CEO and president of Transamerica Institute, a non-profit private foundation that includes Transamerica Center for Retirement Studies.

"There's still relatively low awareness of the saver's credit out there, and concerningly, awareness is even lower among the demographic segments that are more likely to be eligible and benefit from the credit," Ms. Collinson said.

The saver's credit — known formally as the retirement savings contributions credit — allows low- and middle-income Americans contributing to workplace retirement plans or individual retirement accounts to claim a credit against the taxes they owe. The amount of the credit depends on their income, tax filing status and how much they set aside for their retirement.

Under the revised credit structure proposed in the legislation, a couple making $45,000 a year that contributes $2,000 to a retirement account would get a $1,000 credit, up from $200 currently.

"For middle-income individuals, the 10% incentive is pretty low," said Kent A. Mason, a partner at Davis & Harman LLP in Washington, of the current saver's credit. "It's still a good incentive, but it's not a great incentive."

The tax credit now in place decreases as a worker's income increases. A couple filing a joint return with an adjusted gross income of less than $41,000, for example, is eligible for a tax credit equal to 50% of whatever they contribute to their retirement account, up to $2,000. Joint filers making between $41,001 and $44,000 are eligible for a 20% credit and those making $44,001 to $68,000 are eligible for a 10% credit.

Under the proposed new tax credit, workers below a certain income threshold will get a straight 50% credit and those above that threshold will get a slightly reduced credit that is gradually phased out, Mr. Mason said.

Joint filers making less than $48,000, for example, will get a 50% credit and those making between $48,000 and $83,000 will get a credit that very slowly gets smaller as filers' income increases. If a couple is at $49,000, they lose a little bit of the credit, and if they're at $50,000, they lose a little bit more, Mr. Mason said.

At $83,000 or more, the couple would get no credit at all.

"It was designed very carefully to ensure that nobody would be worse off, and many people would be better off by having this 50% credit," Mr. Mason said.

There's a good chance that the credit can get even sweeter still. The Senate is likely to consider making the saver's credit refundable, meaning savers without a tax liability would also get the credit. In the Retirement Security and Savings Act reintroduced in the Senate in May 2021, Sens. Rob Portman, R-Ohio, and Ben Cardin, D-Md., crafted provisions that would make the saver's credit refundable with the money to be deposited into an individual retirement account or a workplace plan designated by the tax filer.

"I certainly wouldn't say it's a sure thing, but I think it's going to be strongly considered," Mr. Mason said of the Senate possibly moving to make the saver's credit refundable. That provision was not in the House bill.

Many workers, however, are not aware of the tax credit, even though it's been available since 2002. Less than half of all workers, 48%, are aware of the incentive, with awareness even lower among workers most likely to benefit from it, according to a survey of 5,493 workers conducted on behalf of Transamerica Institute between Oct. 28 and Dec. 10.

The survey found that only 41% of workers with less than $50,000 in annual household income were aware of the credit.

"Even though the maximum credit available is $1,000 for single filers and $2,000 for married couples filing jointly, the average credit amount that's actually been claimed is only $191," Transamerica's Ms. Collinson said.

Awareness among employers could also improve. More than one-third of all employers, 38%, are unaware of the saver's credit, according to a survey of 1,874 employers conducted on behalf of Transamerica Institute between Nov. 8 and Nov. 24.

The lack of awareness is particularly pronounced among small employers with less than 100 employees, where unawareness sits at 45%, according to the Transamerica report.

Katie Hockenmaier, partner and U.S. defined contribution research director at Mercer LLC in San Francisco, isn't surprised by the higher level of unawareness among small employers.

"It's a staffing issue," Ms. Hockenmaier said, explaining that small employers don't have the human resources to stay abreast of retirement plan "nuances" such as the saver's credit.

Some employers, 19%, are aware of the saver's credit but don't actively promote it to their employees, according to Transamerica, a fact that Ms. Hockenmaier believes could be attributed to the lack of informational material from their retirement plan providers.

"Many plan sponsors do rely on their record keepers for participant engagement communications, and if they're not hearing anything from their record keeper about available materials, they're less likely to go out there and promote something," Ms. Hockenmaier said.

Employers might also be hesitant to give perceived tax advice, she added. "Plan sponsors in general are very cautious of overstepping any lines that could be considered as either investment or tax or legal advice when it comes to qualified retirement plans," Ms. Hockenmaier said.

Transamerica Institute's Ms. Collinson offers another theory, saying employers might be reluctant to promote the saver's credit because the terminology around it could reflect negatively on their compensation practices.

"The language around the saver's credit is that it's for low- to moderate-income workers, and that might be uncomfortable language for employers to reach out to their employees," she said.

To get around that concern, Ms. Collinson recommends that plan sponsors talk about eligibility requirements in their promotional materials and avoid adjectives like low to moderate income. No one wants to "self-identify" as being low or moderate income, she said.