Announcement 2001-106

Description of Saver's Credit and Sample Notices to Employees in English and Spanish (Reformatted only by Milberg Consulting LLC; copied word for word from Announcement 2001-106)

Part IV. -- Items of General Interest

This announcement describes the new "saver's credit," an income tax credit that is available to eligible taxpayers who contribute to a retirement plan or IRA. This announcement includes a sample notice that employers can give to employees explaining the credit.

Q-1: What is the saver's credit?

A-1: The saver's credit is a nonrefundable income tax credit for certain taxpayers with adjusted gross income that does not exceed $50,000. It is equal to a specified percentage of certain employee contributions made to an employer-sponsored retirement plan or of certain individual or spousal contributions to an individual retirement arrangement (IRA) for taxable years beginning after December 31, 2001, and before January 1, 2007. The saver's credit is contained in section 25B of the Internal Revenue Code, which was added by section 618 of the Economic Growth and Tax Relief Reconciliation Act of 2001.

Q-2: Who is eligible for the saver's credit?

A-2: Taxpayers who are age 18 or over before the end of their taxable year, other than full-time students or persons claimed as dependents on another taxpayer's return, are eligible for the credit.

For this purpose, students include individuals who, during some part of each of five months during the year, are (a) enrolled at a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or (b) taking an on-farm training course given by such a school or a state, county, or local government. A student is a full-time student if he or she is enrolled for the number of hours or courses the school considers to be full-time.

Q-3: What is the maximum annual contribution eligible for the saver's credit?

A-3: $2,000 per year.

Q-4: Is the amount of the annual contribution eligible for the saver's credit ever reduced?

A-4: Yes. The amount of any contribution eligible for the saver's credit is reduced by the amount of any taxable distribution received by the taxpayer (or by the taxpayer's spouse if the taxpayer filed jointly with that spouse both for the year during which a distribution was made and the year for which the credit is taken) from any plan described in A-5 below during the testing period. The testing period consists of the year for which the credit is claimed, the period after the end of that year and before the due date (with extensions) for filing the taxpayer's return for that year, and the two taxable years that precede the year for which the credit is claimed. In the case of a distribution from a Roth IRA, this reduction applies to any such distribution, whether or not taxable, that is not rolled over. An amount does not count as a distribution for purposes of the reduction rule if the distribution is a return of a contribution to an IRA (including a Roth IRA) made for the tax year and (1) the distribution is made before the due date (including extensions) of the individual's tax return for that year, (2) no deduction is taken with respect to the contribution, and (3) the distribution includes any income attributable to the contribution.

For example, if an individual contributes $3,000 to a 401(k) plan during 2002, but had taken a $500 IRA withdrawal during that year and a $900 IRA withdrawal during 2001 and neither of these withdrawals was rolled over, the amount of that individual's 2002 plan contribution eligible for the credit is $1,600 ($3,000 - $500 - $900), instead of the $2,000 that would have been eligible for the credit if no withdrawals had been taken.

Q-5: What types of contributions are eligible for the saver's credit?

A-5: Salary reduction contributions to the following arrangements are eligible for the credit: a 401(k) plan (including a SIMPLE 401(k)), a section 403(b) annuity, an eligible deferred compensation plan of a state or local government (a "governmental 457 plan"), a SIMPLE IRA plan, or a salary reduction SEP. The saver's credit is also available for voluntary after-tax employee contributions to a tax-qualified retirement plan or section 403(b) annuity. For purposes of the credit, an employee contribution will be "voluntary" as long as it is not required as a condition of employment. Finally, the saver's credit is available for contributions to a traditional or Roth IRA.

An amount contributed to an individual's IRA is not a contribution eligible for the saver's credit if (1) the amount is distributed to the individual before the due date (including extensions) of the individual's tax return for the year for which the contribution was made, (2) no deduction is taken with respect to the contribution, and (3) the distribution includes any income attributable to the contribution.

Q-6: What is the saver's credit rate?

A-6: The saver's credit rate is based on the taxpayer's adjusted gross income for the taxable year for which the credit is claimed, as follows:

All other filers

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For example, a taxpayer whose filing status is single with adjusted gross income of $15,000 may be entitled to a credit equal to 50% of his or her contributions (up to $2,000 of contributions) to a plan described in A-5 above.

Q-7: Does the saver's credit affect an eligible individual's entitlement to any deduction or exclusion that would otherwise apply to the contribution?

A-7: No. Eligible individuals entitled to deduct IRA contributions or to exclude plan contributions from gross income will be able to deduct or exclude those amounts and also claim the saver's credit.

Q-8: Can a taxpayer use the saver's credit to offset both an alternative minimum tax liability and a regular income tax liability?

A-8: Yes.

Q-9: For married taxpayers filing jointly, do contributions by or for either or both spouses give rise to the saver's credit?

A-9: Yes, contributions by or for either or both spouses, up to $2,000 per year for each spouse, can give rise to the saver's credit.

Q-10: Are salary reduction and after-tax employee contributions that are eligible for the saver's credit taken into account in the ADP and ACP nondiscrimination tests of sections 401(k) and (m) of the Internal Revenue Code?

A-10: Yes. Salary reduction contributions to a 401(k) plan, whether or not those contributions give rise to the saver's credit, are taken into account in the nondiscrimination test for salary reduction contributions (the ADP test) for plans subject to that test. Also, voluntary after-tax employee contributions to a qualified plan, whether or not those contributions give rise to the saver's credit, are taken into account in the nondiscrimination test for employee after-tax contributions (the ACP test) for plans subject to that test.

Q-11: Can an individual claim the saver's credit for an amount contributed to a plan pursuant to automatic enrollment?

A-11: Yes. Any amount that is treated as an elective contribution on behalf of an eligible individual to an employer plan described in A-5 above can give rise to the saver's credit.

Q-12: Can an individual take a projected saver's credit into account in figuring the allowable number of withholding allowances on Form W-4?

A-12: Yes. For information on converting credits into withholding allowances, see IRS Publication 919, "How Do I Adjust My Withholding?"

Q-13: Is there a sample notice that employers can use to help explain the saver's credit to employees?

A-13: Yes. Employers are encouraged to tell their employees about the credit. Employers can inform employees in any way they choose, including use of the notice set out below in English or Spanish.

NOTICE TO EMPLOYEES REGARDING SAVER'S CREDIT

NOTIFICACIÓN PARA LOS EMPLEADOS SOBRE EL CRÉDITO DE AHORRO

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DRAFTING INFORMATION

The principal author of this announcement is Roger Kuehnle of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this announcement, please contact the Employee Plans' taxpayer assistance telephone service at 1-877-829-5500 (a toll-free number), between the hours of 8:00 a.m. and 9:30 p.m. Eastern Time, Monday through Friday. Mr. Kuehnle may be reached at (202) 283-9888 (not a toll-free number).

Reformatted only by Milberg Consulting LLC; copied word for word from Announcement 2001-106