Obama Budget Proposals Include Enhanced Saver’s Credit, Auto IRA

The Obama Administration is proposing changes in the Saver's Credit and provisions to require employers to offer an automatic IRA. Both are contained in the Administration's proposed 2010 budget.

The Saver's Credit changes are aimed at expanding the number of moderate and lower income individuals who use the program to boost their retirement savings. As the program now operates, individuals within certain income limits get a tax credit based on the voluntary contribution they make to a qualified retirement plans such as 401(k) and 457 plans or an IRA. The credit rate varies according to the taxpayer's adjusted gross income.

Currently, the Saver's Credit is "nonrefundable," meaning it only offsets a taxpayer's income tax liability -- to get the credit, an individual must pay income taxes. Making the credit "refundable" would in effect turn it into a matching contribution that would be automatically deposited into a qualified retirement plan account or IRA to which the individual had contributed. The individual would not have to pay income taxes in order to receive the credit.

To further broaden participation, the Administration also proposes to raise the income limits to $65,000 annually for married couples filing jointly; $48,750 for heads of households, and $32,500 for singles. The matching formula would also be simplified. The proposal would go into effect on December 31, 2010.

The Administration is also proposing that certain employers – those in business for at least two years that have 10 or more employees would be required to offer an automatic IRA option. Contributions would be automatically deducted from payroll checks.

Employees would be offered an opportunity to participate or opt out of the IRA. Any employee who did not respond would be automatically enrolled at a default rate of three percent of employee's compensation. A low-cost standard type of default investment and a small number of low cost investment alternatives would be prescribed by statute or regulation.

Contributions by employees would qualify for the Saver's Credit. There would be no employer contribution or employer compliance with qualified plan requirements. A national Web site would provide information and education about the program. The proposal would become effective on January 1, 2012.