Industry wild about government match for low earners

A little-used tax credit for low- and middle-income retirement savers may finally get the takeup policymakers have long desired, thanks to a major makeover under the Secure 2.0 Act.

As part of the legislation signed into law on Dec. 29, lawmakers revamped the clunky "saver's credit" and refashioned it into a "saver's match."

Beginning in 2027, low- and middle-income workers who contribute to a workplace retirement savings plan or individual retirement account will be eligible for a 50% match on up to $2,000 they put into their accounts, courtesy of the federal government.

For individuals making less than $20,500, that translates into $1,000 if they manage to set aside $2,000. For couples earning less than $41,000, the match can go as high as $2,000 if they put $4,000 in. The matches will be deposited directly into their retirement accounts.

"It's going to make a massive difference," said Nevin Adams, head of retirement research and chief content officer at the American Retirement Association in Arlington, Va., of the saver's match.

The saver's match will replace the current saver's credit, which has not been widely used because it's complex, difficult to explain and largely unknown.

The mere renaming of the credit as a match will make it much easier for workers to grasp, said Catherine Collinson, the Los Angeles-based CEO and president of Transamerica Institute, a non-profit private foundation that includes the Transamerica Center for Retirement Studies.

"The term 'match' is widely known among workers in the U.S., so that will help it resonate," she said.

The tepid uptake of the current tax credit is also due to the fact that it is non-refundable, meaning it is applied to the taxes that savers owe. In other words, low- and middle-income retirement savers who owe no tax — and there are many — receive no benefit.

"You have to have a tax obligation in order to take advantage of it," Mr. Adams said of the saver's credit.

In addition to making the credit refundable and turning it into a match, lawmakers simplified it and made it easier to understand — all in a bid to spur more low- and middle-income earners to use the incentive in its reincarnated form. The new saver's match eliminates the complex tiering of the saver's credit and replaces it with a flat 50% match that gradually phases out as a saver's income increases.

The legislation also directs the Treasury Department to promote the match. The Treasury secretary must report its anticipated promotion efforts to Congress no later than July 1, 2026.

"I think that giving the Treasury money to help increase public awareness of it is going to be extremely important," said Alicia Munnell, director of the Center for Retirement Research at Boston College, of the saver's match.

One of the reasons the current saver's credit is hardly used is that "most people don't even know it exists," she said.

The saver's credit will remain in place until the saver's match becomes available in 2027.

The new saver's match has industry observers singing its praises.

"If you focus on the most impact for low- and middle-income individuals, this has the potential to be the top provision of SECURE 2.0," said Kent Mason, a partner at Davis & Harman LLP in Washington.

Mr. Mason noted the huge difference that the new match would make for workers who had no tax liability.

"They went from getting nothing to getting a very substantial match," he said.

Boston College's Ms. Munnell also applauded the revamped incentive, saying it made SECURE 2.0 worthwhile. Were it not for the saver's match, she would have "canned 2.0."

"I would not have passed it because it seemed like a piece of legislation that did nothing but give goodies to high earners," she said, referring to provisions such as delaying required minimum distributions and increasing catch-up limits. "I find the saver's match such a desirable and major change that it sort of makes the bill overall acceptable, whereas before it definitely was not."

Ms. Munnell also noted that the saver's match would give state-run auto-IRA programs a boost.

"It will make state auto-IRA programs more attractive," she said, explaining that the saver's match would motivate more people to participate in the programs and "maybe save more."

Dan Doonan, executive director of the National Institute on Retirement Security in Washington, was also enthusiastic about the saver's match. "We think it's very well targeted toward the soft middle of the retirement system," he said, referring to middle-income workers whose tax incentives to save for retirement he describes as "not terribly valuable."

Under the new legislation, retirement savers receive a straight 50% match on up to $2,000 contributed until they hit the maximum modified adjusted gross income, which varies by tax filing status.

After hitting the maximum MAGI, the 50% match gradually phases out to zero.

Take, for example, joint tax filers whose MAGI is $41,000 and single filers whose MAGI is $20,500. Joint filers making more than $41,000 and single filers making more than $20,500 would see gradually declining matches as their income increased to $71,000 and $35,500, respectively.

If a couple is at $42,000, they would lose a little bit of the 50% match, and if they're at $43,000, they would lose a little bit more, Mr. Mason said. At $71,000, they would not get a match at all.

The saver's credit currently has three distinct credit rates at 50%, 20% and 10% for different income ranges, creating what critics called "sharp income cliffs."

A couple earning less than $41,000, for example, can receive a 50% saver's credit for their retirement plan contribution, capped at $4,000, for a maximum credit of $2,000. A similar couple with income of $41,001, or just $1 more, however, would receive only a 20% credit or $800.

Still, how much impact will the new saver's match have?

In a world where employers are constantly exhorting their workforce to "maximize the match," how many joint filers making less than $41,000 will be able to set aside $4,000 to get the maximum $2,000 match?

"You don't have to go to the max to benefit from this," Mr. Mason said, explaining that a more modest $200 contribution immediately becomes $300.

"You get people into the culture of savings and seeing their savings grow immediately by 50%," he said.

Ms. Munnell echoed that view, noting strong participation in state-run auto-IRA programs, which primarily cover lower-paid people.

"Even if they do half of it, it is a way to get some money in there," she said, referring to the amount savers need to contribute to maximize the government match.

Transamerica's Ms. Collinson noted that differences in the cost of living can make it easier for some individuals to get the most out of the match, as "$41,000 a year in certain parts of the country goes much farther than other parts of the country, so it can help many people, especially in areas where the cost of living is lower," she said.

If the saver's match is to live up to expectations, however, lawmakers and industry will have to overcome a slew of challenges, not least of which is promoting the incentive.

"A government promotional campaign on its own is likely not enough. It requires a collective effort among the government, the industry, the media and non-profits to get the word out," Ms. Collinson said.

There will also be huge administrative and logistical hurdles.

"The challenge is going to be how are we going to figure out how to get all this money from the federal government into all of these individual accounts?" Mr. Nevins said.

Mr. Mason noted that the "machinery to establish an interface" between the Treasury Department and millions of IRAs and workplace retirement savings plans has yet to be put in place.

"Companies are not set up to accept government transfers. IRAs are not set up to accept government transfers. Plans certainly are not set up to accept government transfers like this," he said. Mr. Mason also raised an issue that was not addressed in the legislation regarding employees who leave their jobs after making contributions to their workplace retirement plans. Where, he asks, will their government matches go once employees leave if they don't have IRAs?

As challenging as the obstacles are, Ms. Munnell is optimistic these can be cleared. "If we can put telescopes into space, we can do this," she said.