Compliance December 19, 2016

Internal Revenue Service Stresses Importance of Savers’ Credit

The coming tax-filing season is a great time to remind eligible retirement plan participants to claim the savers’ tax credit. 
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The Internal Revenue Service (IRS) reminds low- and moderate-income workers that they can take steps now to save for retirement and earn a special tax credit in 2016 and years ahead.

The so-called Saver’s Credit helps offset part of the first $2,000 workers voluntarily contribute to individual retirement accounts (IRAs) and 401(k) plans and similar workplace retirement programs.

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Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply. Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2016 tax returns.

“People have until the due date for filing their 2016 return (April 18, 2017), to set up a new individual retirement arrangement or add money to an existing IRA for 2016,” IRS notes. “This includes the Treasury Department’s myRA. However, elective deferrals (contributions) must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, or the Thrift Savings Plan for federal employees.”

Employees who are unable to set aside money for this year may want to schedule their 2017 contributions soon so their employer can begin withholding them in January, IRS suggests.

The saver’s credit can be claimed by married couples filing jointly with incomes up to $61,500 in 2016 or $62,000 in 2017; heads of household with incomes up to $46,125 in 2016 or $46,500 in 2017; and married individuals filing separately and singles with incomes up to $30,750 in 2016 or $31,000 in 2017.

“Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed,” IRS says. Though the maximum saver’s credit is $1,000 ($2,000 for married couples), the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

NEXT: Claiming the tax credit 

According to the IRS, a taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.

In tax year 2014, the most recent year for which complete figures are available, saver’s credits totaling nearly $1.4 billion were claimed on more than 7.9 million individual income tax returns.

The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

Other special rules that apply to the saver’s credit include the following:

  • Eligible taxpayers must be at least 18 years of age.
  • Anyone claimed as a dependent on someone else’s return cannot take the credit.
  • A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.
  • Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2016, this rule applies to distributions received after 2013 and before the due date, including extensions, of the 2016 return. Form 8880 and its instructions have details on making this computation.
Compliance December 19, 2016

Recommendations Made to Help With Loss of Determination Letter Program

ERIC has made suggestions to the IRS to help qualified individually designed retirement plans that no longer have the ability to file for determination letters.
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In June this year, the Internal Revenue Service (IRS) officially ended its determination letter program for tax-qualified individually designed plans and ended the remedial amendment cycle system and replaced it with a new approach to the remedial amendment period.

When the IRS first announced its intent to end the program, there was a question of what plan sponsors, especially those with individually designed plans would do.

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Prior to the IRS’ decision, the Employee Plans Subcommittee (EP Subcommittee) of the Advisory Committee on Tax Exempt and Government Entities (ACT) said all members “strongly concur” the IRS should not eliminate periodic determination letters under the retirement plan determination letter program.

In September, the Treasury and IRS requested comments about ways they can improve compliance with plan qualification requirements by making it easier for plan sponsors to satisfy requirements for qualified plan documents, particularly in light of the changes to the determination letter program.

In response, the ERISA Industry Committee (ERIC) filed comments saying:

  • Plan sponsors should be allowed to incorporate by reference statutory and regulatory provisions that have few, or no, optional features, such that the incorporation would be readily administrable by reference to those provisions. In order to ensure compliance with the definitely determinable benefit requirement, sponsors would be required to explicitly describe in the plan document any optional features that they select.
  • Plan sponsors should be permitted to omit from their governing documents, in the interests of simplicity and clear documentation, provisions that do not apply to their plans due to the status of the plan sponsor or the design of the plan.
  • The IRS should adopt a flexible approach to the existence of form defects discovered on audit, to the extent that (i) the plan sponsor had in place an administrative practice to regularly review its plan document for form compliance, and (ii) no participants or beneficiaries were harmed by the defect.

“The loss of the determination letter program for on-going individually designed plans is immeasurable, but we hope the agencies act on the comments we provided, which will ease the compliance burden on plan sponsors,” says Will Hansen, senior vice president of Retirement Policy at ERIC. “It is important that individually designed plans that contain unique provisions reflective of individual company benefit priorities and culture are allowed to continue. And, that employers are not forced to pick plans ‘off the shelf’ that do not offer the same benefits and investment opportunities that their current plans allow for employees to partake in.”

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