Key Takeaways
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- In the past, and for the next few years, the Internal Revenue Code provides for a nonrefundable tax credit for low-paid individuals who make plan, IRA or ABLE contributions. Unfortunately, that credit was seldom claimed on tax returns, possibly because of a lack of awareness among low-paid taxpayers.
- However, under SECURE Act 2.0—beginning in 2027—the tax credit will become refundable, but not to the individuals. Instead, the Federal government will deposit matching contributions into the IRAs and plan accounts of those individuals.
- The administrative complexity of depositing the Federal matches into those IRAs and plan accounts is significant. Nonetheless, it is an effort by Congress to help the lowest paid workers in the country–or at least to help those who make enough money to contribute into their IRAs and plans.
- However, for workers who don’t earn enough to have disposable income to put into their IRAs or plans, this change doesn’t address their circumstances.
The President signed the Consolidated Appropriations Act, which included SECURE Act 2.0, on December 29, 2022.
SECURE Act 2.0 has over 90 provisions, some major and some minor; some mandatory and some optional; some retroactively effective and some that won’t be effective for years to come. One difference between the SECURE Act 2.0 and previous retirement plan laws is that many of 2.0’s provisions are optional…that is, plan sponsors are not required to adopt the provisions, but can adopt them if they decide that the change will help their plans and participants. This series discusses the provisions that are likely to be the most impactful, either as options or as required changes.
This article discusses the provision that is, in my opinion, the most unique in SECURE 2.0. It is one of the mandatory provisions, but it doesn’t become effective until 2027, probably because of the considerable changes needed to implement and administer the provision. Section 103 of SECURE 2.0 creates a “Saver’s Match” for low-income workers to be funded by the Federal government.
The Senate Finance Committee’s summary of the provision is:
Section 103, Saver’s Match. Current law provides for a nonrefundable credit for certain individuals who make contributions to individual retirement accounts (“IRAs”), employer retirement plans (such as 401(k) plans), and ABLE accounts. Section 103 repeals and replaces the credit with respect to IRA and retirement plan contributions, changing it from a credit paid in cash as part of a tax refund into a federal matching contribution that must be deposited into a taxpayer’s IRA or retirement plan. The match is 50 percent of IRA or retirement plan contributions up to $2,000 per individual. The match phases out between $41,000 and $71,000 in the case of taxpayers filing a joint return ($20,500 to $35,500 for single taxpayers and married filing separate; $30,750 to $53,250 for head of household filers). Section 103 is effective for taxable years beginning after December 31, 2026.
In effect, beginning in 2027 there will be 3 sources of funding for low-income participants in 401(k) plans—participant deferrals, employer matching and nonelective contributions, and Federal matching contributions.
For taxpayers who make $41,000 or less, and who file joint returns, the matching contribution will be 50% of the deferral up to a maximum deferral of $2,000. In other words, the maximum match is $1,000. (Technically, the definition of income is the taxpayer’s “modified adjusted gross income”.)
It the taxpayers who make more than $41,000, but no more than $71,000 (again on joint returns), the match percent (that is, the 50%) phases out pro-ratably.
To obtain the Federal match, a low-income taxpayer will need to file a tax return and claim the match. Presumably, the tax return will need to have an attachment that has information about the plan and the participant’s account so that the money can be deposited and credited to the participant’s account. And, also presumably, plans will need to give information to the participants about where the Federal match should be deposited and about the amount deferred by the participants—perhaps as a schedule that can be attached to a participant’s tax return. I assume that the IRS will want to have enough creditable information to have a reasonable basis to limit the kinds of fraud that could occur as a result of this “free” money. But don’t take that as a criticism of the provision. It’s clear that our retirement system has limitations when it comes to our lowest income earners. And that is a problem that needs a solution. The big question, though, is whether this is the right way to solve the problem. For example, would it be better to increase the amounts that Social Security pays to older, poorer Americans? That’s not a proposal….it is just to point out that there are different ways to handle poverty in retirement.
Concluding Thoughts
The implementation of this provision will be incredibly complex. Fortunately, though, the complexity will probably not fall on employers. The burden will first be on the low-income participants…to file their tax returns with the necessary information. Then it will fall on the Federal government and plan recordkeepers to devise and administer systems for the deposit of the Federal Saver’s Match.
