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Using the Saver’s Tax Credit to Increase 403(b) Plan Participation

This article originally ran on December 15, 2014.

By Ellie Lowder

We have heard employers express concern about increasing participation in their 403(b) plans for two important reasons:

1) to permit employees to retire at normal retirement ages (which benefits the employer that replaces retiring employees with new hires at lower wages); and

2) to avoid the problem if the IRS, in an audit, determines that the employer is not providing meaningful opportunity to employees to participate or make contribution changes in the plan.

The IRS has said that providing meaningful opportunity to enroll or make changes must include year-round activity (webcast presented by a senior IRS staff member and this author in August 2013). 

In previous articles, we have talked about methods the employer should employ to provide that “meaningful opportunity,” including financial literacy workshops for all employees; access to financial advisors, ongoing communications and informational website access. This article focuses on providing the opportunity to lower income employees — a group that may believe that participation in the 403(b) plan is not affordable.

Enter the saver’s tax credit!

The saver’s tax credit is a tax credit of up to 50% of each dollar up to $2,000 in contributions to a retirement plan, or an IRA is available for low-income employees. In 2015, that credit is available to joint filers earning under $61,000 and to single filers earning up to $30,500. 

This tax credit is a dollar-for-dollar reduction in federal income taxes owed; thus, can be used to make the retirement savings affordable. The IRS provides Form 8880 which includes instructions and worksheets so that financial advisors can help low-income employees calculate the available tax credit. The financial advisor can also help each low-income employee understand how to adjust the withholding of income tax to properly reflect the actual amount of tax that will be owed. The adjustment of withholding from the paychecks of low-income employees can make it affordable to make contributions with little reduction in bring home pay. 

The IRS provides the following chart with more specific information on income levels eligible for the tax credit, which is based on adjusted gross income (note that the deferrals to the 403(b) plan do reduce that adjusted gross income and should mean that more are eligible for the credit or are eligible for a larger credit).

2015 Saver's Credit

Credit Rate

Married Filing Jointly

Head of Household

All Other Filers*

50% of your contribution

AGI not more than $36,500

AGI not more than $27,375

AGI not more than $18,250

20% of your contribution

$36,501 - $39,500

$27,376 - $29,625

$18,251 - $19,750

10% of your contribution

$39,501 - $61,000

$29,626 - $45,750

$19,751 - $30,500

0% of your contribution

more than $61,000

more than $45,750

more than $30,500


Employers should communicate with employees about the saver’s credit (ask the product providers, the financial advisors representing those providers and the third party administrator to help plan a good communication initiative) so that the population of low-income employees are motivated to take advantage of the ability to save for retirement in an affordable way!

Financial advisors should obtain IRS Form 8880 to be prepared to help employee calculate their own specific saver’s credit, and check with the payroll or human resources personnel to obtain the forms necessary to adjust withholding to reflect actual income taxes that will be owed.

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