Introduction and definition of a key term:
Filene Research Institute (Filene) has engaged and worked with Progress Through Business (Progress) on several very successful projects. It was thought that, with our experience with tax preparation and financial education programs, a plan of action could be developed jointly to serve those eligible for the Savers’ Credit1. Since the Savers’ Credit is central to this project and its write-up, we want to offer this definition, from the IRS, of the Savers’ Credit.
- The Savers’ Credit is a Federal non-refundable tax credit available to lower income individuals and households that contribute to qualified retirement savings plans. This includes employer-sponsored plans such as 401(k), simple and SEP plans, or the governmental 457 plan, along with contributions to traditional and Roth IRAs. The amount of the credit will depend on the adjusted gross income of the individual or household and the size of the contribution. A taxpayer must be at least 18 years old to be eligible for the credit. Individuals that are full-time students, were full-time students for at least five months of the year, or filed as dependents are not eligible.The maximum contribution amount to which this credit can be applied is $2,000. For households with an adjusted gross income of $30,000 and under ($22,500 for individuals) the credit rate is 50%. Households with an adjusted gross income of between $30,001 and $32,500 ($22,501 – $24,375 for individuals) the credit rate is 20%. For households earning an adjusted gross income of $32,501 to $50,000 ($24,376 – $37,500 for individuals) the credit rate is 10%. For example, an individual earning $22,900 who contributes $2,000 to a retirement plan will receive a tax credit of $400 ($2,000 x 20%).
The salient aspects of the Savers’ Credit law include:
- Income limits
- The necessity for a “qualified retirement savings plan”
- The necessity to contribute to that plan
INITIAL STAGES OF THE PROJECT:
Initially, the project was developed by a number of credit unions, none of which participated in the program.
The early view of the program, once we were involved, was that it would fit nicely with the existing tax initiatives started by Progress and regional Credit Union Leagues (CUL) and individual Credit Unions (CUs). The concept also aligned well with the Volunteer Income Tax Assistance (VITA) sites already existing at CUs nationally. Internal surveys by Filene yielded some 16 CUs that stated that they may have an interest in incorporating the SCP into new or existing programs designed to augment community outreach.
Progress has started successful employer based tax programs in six states within the last 5 years. These programs are generally very well received and vibrant. They do, however, start with an employer willing to support the concept of benefitting their employees. Several programs were in conjunction with CULs and individual CUs. The National Credit Union Foundation (NCUF) was instrumental in funding one such program in Arizona.
Utilizing the expertise available at the CUL was one aspect that Progress felt confident would help to insure success with this project. A selling approach2 was developed and agreed upon between Filene and Progress. Filene issued a press release3. Both were incorporated into initial calls and emails to the initial group previously identified by Filene as having some interest in the project.
- Selling Financial Education and Savers Clubs
- The tax program your CU completed recently was designed to help your employees with an employee benefit that put extra cash into their pockets through the use of tax credits, other tax related deductions and not having to pay a preparer.
- another aspect of that program is education
- The RP-3 program as conducted in the WI CUs, has had amazingly positive results
- The program has always been designed to encourage participation in the employer’s retirement plan(s)
- Our program, funded through the Filene Research Institute, uses the concept of a Savers’ Club and accomplishes three important goals:
- Financial education; Tax savings allowing participants to gain the Saver’s Tax Credit; and Saving for Retirement through recognized methods.
- It can utilize any automated savings deposit program you may already have to create “Savers Clubs”
- Once a member of a Savers Club, the members receive free online financial education (provided through Precision Information/Educated Investor University) and agree to automatically deposit to qualified retirement savings plans.
- Current employees as well as employees of SEGs and your general member base would be eligible to join. The tax benefits would depend on the income classifications as determined by the IRS (mainly low income wage earners similar to those in your existing tax program).
- Progress Through Business will help direct a program with employees at the inception of the project to clarify the benefits of saving for retirement, encourage participation in the employer’s existing 401(k) plan or similar plan and administer a simple assessment of the level of financial acumen within the club members. Progress will later assess the level of participation and the degree to which the financial education concepts were absorbed (testing) and report the results.
- The final goal would be to have Saver’s Clubs for groups of 20+ individuals in house or at SEGs with significant numbers of qualifying employees
- Cost, there is no cost to the CU for Progress participation. Soft costs, similar to those encountered in your tax program will pertain.
3. MADISON, Wis. (4/7/11)–The Filene Research Institute has formed a coalition of credit unions to establish savings groups for low-income individuals in their communities.
The coalition is planning for service related to tax forms which will be filed during 2012. Because The Saver’s Credit, the Earned Income Tax Credit and the refunds that taxpayers receive are all major contributors to the savings mix, Filene convenes the group to help taxpayers preserve as much of their refund as possible.
The project, partially funded by the National Credit Union Foundation (NCUF), seeks to help members save for the future.
The project originated as a Filene i3 (Ideas, Innovation, Implementation) initiative called Savings Exchange. The i3 team collaborated with Kim Pate of the Corporation for Enterprise Development (CFED) and included Jackie Edwards, Connexus CU, Wausau, Wis.; Tamela Meade, American Airlines CU, Fort Worth, Texas; Jon Reske, UMass Five College FCU, Hadley, Mass.; and Alison Wolf, FAA CU, Oklahoma City, Okla.
Project consultants are John Hoffmire and Craig Wilson from Progress Through Business, a national nonprofit organization that works with underserved communities. Hoffmire also is director of the Center on Business and Poverty, which is part of the Puelicher Center on Banking Education at the Wisconsin School of Business, UW-Madison.
Filene recommends the program for credit unions active in the Volunteer Income Tax Assistance program, paid tax services, and with the Investor Education In Your Workplace program, which is sponsored by the Investor Protection Trust and supported by NCUF.
Tax time is essential for savers, because the average refund for a family is $1,400, said Filene. This is one of the largest bundles of income that many people receive in a year. Also, for low- and middle-income taxpayers, a saver’s credit of up to $1,000 ($2,000 for couples) is available if they contribute to retirement savings plans.
Filene is recruiting more credit unions to participate.
The first calls to interested CUs went out in April and May 2011. About 40% of those resulted in follow up meetings, mainly telephonic.
Progress and Filene agreed that unless the CU “owned” the program it would not succeed. A Memorandum of Understanding (MOU) was cooperatively developed by Progress and Filene to underscore that this was an important outreach for the CU.4
It was the job of Progress to convince the CUs and in some cases the CUL of just that, i.e., that the suggested program would fit nicely with existing outreach and not be a burden. Progress offered two sessions for potential participants; one before tax season and one following to gather data and educate them. These computer based educational components would be provided gratis but did require the CU to institute both sessions.
RESULTS – RECOMMENDATIONS – REFLECTIONS
A serious lack of interest in the program was the first and most surprising result. From Alabama to Arizona; New York to Washington, there was simply scant interest in engaging in the program as outlined. It was those identified as “interested” by Filene that upon further reflection completely rejected participation.
The idea of incorporating a savers’ club component into already existing VITA sites located on CU campuses has not generated interest. We explored the idea with 45+ credit unions throughout the US and only four signed the MOU and three agreed, verbally, to undertake the project. Near this time, we streamlined the procedure to make it both easier to understand what we were asking of the CU and the CUL. Furthermore, we made it more simple for both CU and CUL to execute what we were asking them to do. Nonetheless, we never succeeded in seeing another very busy member of a CU staff review the program and agree to promote it, even though our contract called for us to attract or maintain ten credit unions who either had originally suggested the program or would join in. As second to last tries, we suggested trial runs at several CUs (in WY, MT and VA) but there was no indication of interest made in any of these states, even though we had CUL support in MT.
It was as John Hoffmire was trying to acquire an eight participant CU in the program that the project took a fairly sudden departure from its intended path. John was talking with a Vice President of one of the CUs where he had helped to set up a VITA site. After a spirited and friendly conversation in which the VP and John had identified the following attributes of the project, that a fairly stark conclusion was reached:
- All of the CU proposers of the project had dropped out
- The project was really only pertinent to CUs with large SEG relationships
- The only CU members who could participate in the project were those who were at SEGS and who were currently paying tax
- The only citizens or green card holders who were eligible to participate were part of the 49% of our population who pay tax on a net basis
- The only potential participants in our program who were likely to have significant levels of Savers’ Credits (above $200) were those who were lowest income and least likely to save while still being net tax payers
- There would be significant time spent analyzing who was eligible for the Savers’ Credits on the parts of the SEGS
- The SEGS would then have to advertise a benefit that only a small percentage of their employees would benefit from (potentially alienating the other SEG members who were not eligible)
- The CU would then have to work with those who were eligible and not other members of the CU (this was extraordinarily difficult for the particular CU that John was speaking with given that this CU had a community development orientation and, because of the nature of the Savers’ Credit guidelines, low-income family members were not eligible to participate because these same members usually were not net tax payers)
It was at this point that we finally concluded that we were working on a flawed campaign. The VP basically said to John: “ok, so what you are saying to me is that you want our credit union to sign up for a program that probably will not be very good for our members and that on a net net basis will not help our institution”. At that point John said to the VP, “No, that is not what we want you want to do”. Then John called Filene and the project was re-oriented toward simply collecting information from the existing signatories of the MOUs and from those who had verbally agreed to participate.
Perhaps it would be useful to review some of the demographic problems with the original program from an analytical perspective. The target population for SCP was not actually a large part (a majority) of the group already involved in VITA or the programs started by Progress. The groups most likely to benefit from the Savers’ Credit are households which fit just under the maximum income level of VITA of $50,000 and single individuals earning about the maximum, $37,500. Especially for families, this group is the only part of the VITA community that pays taxes. For those who make less, the Earned Income Tax Credit creates zero tax burden or takes earners to a position of being recipients of a tax rate, on the federal level, of being as beneficial as a negative 36% tax.
Furthermore, we have found that the families which make less than $36,000 are hard pressed to save and contribute to retirement plans. The credit seems to work best for employed older and single individuals versus the more traditional VITA site client (married, family etc). If one of the goals of program is the potential to attract new savers then we may be working at cross purposes.
Thus, our success was very limited. When we went back and spoke with those who responded to our appeal for information after tax season, five of the seven credit unions returned our calls. Of those, the only one which gave us statistical information was the UW Credit Union. The others simply said that the Savers’ Credit did not play a significant role in their credit union’s involvement with VITA.
To make matters worse, we found that the IRS, this year, had not called the Savers’ Credit the Savers’ Credit. Instead, it was listed on the 1040 as part of the Retirement Savings Contributions Credit. When we learned this, we were even more content with our decision to pull back from the original plan for the project. We would have trained CU personnel and SEGs to have their members and employees prepare for a credit which have turned up under another name. In the end, we were very fortunate that we did not use the materials which the UW Credit Union prepared under our direction and which we would have shared with other CUs.
From an armchair quarterback’s perspective, another aspect of the project that we came to an understanding of was this. Many CUs simply have too much on their plates to entertain yet another outreach program. They are especially too busy to promote a campaign with limited application to their members.
In almost all ways, we were fortunate that many were not convinced of the efficacy of the business model we were proposing. The idea of involving SEGs was apparently too novel and never gained traction. Some did not offer retirement accounts at their institutions making the whole idea untenable.
Another learning came as a few CU stated that they could/would not sign the MOU because of the bureaucratic hassle involved in getting the necessary approvals.
The SCP could be valid for a CU somewhere but for a seemingly small segment of even their member base. If this program is to move forward, significant buy-in by the CEO of each CU or group of CUs is essential. In almost all instances we spoke with program managers with limited decision making authority and who, quite possibly, were already overburdened by workload. To add another piece that was not clearly beneficial to their demographic served may have been unacceptable.
In the end, almost all of the CUs that signed up or gave verbal agreement were friends of the Progress representatives.
To make things almost humorous, we realized once the new 1042 came out that VITA training already involves the Savers’ Credit, under the new name. The volunteer preparers are already filling out every almost every SEG members’ tax form correctly because the appropriate amount to record for the Savers’ Credit is included on the W2. The training for this piece of the work was, consequently very easy. If we had gone ahead with what we had intended to do in regard to training in the late summer, before the VITA training materials came out, we would have made even more mistakes. We may have unwittingly made the simple more complicated.
It is axiomatic that it is impossible to sell and idea or a product unless the potential buyer understands that it is needed. Our CU population was not convinced that SCP was needed. The business/community outreach/return proposition was also not convincing at least to those managers we contacted.
We mentioned several paragraphs earlier in the document that the UW Credit Union provided some statistical data that confirms the points that we have tried to make in this report. Here is the raw data:
- 41 UW Health employees were eligible for the savers’ credit
- This was out of 255 employees who were served by the VITA program
- $6, 944 dollars in savers’credit were awarded
- Average tax savings across the 41 employees was $269
- Average AGI of those 41 employees was $27,628
- Average tax savings for the “campaign” across all 255 employees was $27
- Filing Status Breakdown:
- Single – 19
- Married Filing Jointly – 5
- Married Filing Separately – 0
- Head of Household – 17
- Qualifying Widow/er – 0
Some takeaways from this data are that we were correct to assume that this would significantly be a credit that would not be used, intentionally, by a large swath of the employees. Those who took part did so because they had signed up for a retirement plan and had the credit appear automatically on their W2. Second, a significant percentage of the Savers’ Credit recipients would be single. Third, we were a bit surprised by the lower average incomes of the recipients. But, we assume that this lower average is partly caused by the greater prevalence of part time workers in university towns such as Madison.
We furthermore conclude that since there was no campaign after all at UW Credit Union to encourage Savers’ Credit use, and since the credit, when taken, is lifted directly off of an employee’s W2, the correct way to encourage claiming of the Savers’ Credit is to encourage retirement savings at the level of the SEG.
We conclude this report by including the MOU at this point in the report to memorialize what we had asked the CU to sign.
- Memorandum of Understanding for Savers’ Clubs
The idea for the savers’ clubs comes from the Filene Research Institute, facilitated by Progress Through Business (Progress) and implemented by individual credit unions and credit union leagues throughout the country.
The basic idea is that discipline in savings leads to better financial security. Each credit union is encouraged to create a savers’ club for members, prospective members and perhaps employees who will start or make automatic deposits to a qualified retirement account which in turn will help participants to take advantage of the saver’s credit It is anticipated that most if not all of the credit unions participating in this program will have experience with VITA sites either at their places of business or elsewhere. As such, the clientele served at those sites contains the most viable candidates for savers’ club membership. The process is simple and the goals achievable as well. Savers’ clubs are intended to be an experience where a facilitator from the credit union using online financial learning tools and practical experience relevant to the community meets with members and/or employees to encourage and support their efforts to save and become more financially literate. These meetings would be held in the credit union offices as frequently as the credit union deems appropriate. There are two very important savers’ club meetings that relate specifically to tax time. The first meeting would be held just before tax time, perhaps in early January. This meeting is to inform the members just what to bring to a VITA site to complete a tax return (records, receipts, W-2s, etc). For those who have not yet set up an account, it is time to do that as well. Utilizing material from the online education, this session can be completed easily and quickly. The second important meeting is held immediately following tax season as near to April 15th as is practical. The focus of this meeting is to get the feedback from participants. The invitees would include the club members who participated in the VITA experience as well as those who did not. We are most interested in having you record, in the most simple way, the experience as related by members of savings clubs. It is our expectation that participants will be proud of their ability to save for retirement and that the discipline also resulted in a tax benefit (Saver’s Credit). COSTS AND PROCESS
It is anticipated that most if not all of the credit unions participating in this program will have experience with VITA sites either at their places of business or elsewhere. As such, the clientele served at those sites contains the most viable candidates for savers’ club membership.
The process is simple and the goals achievable as well. Savers’ clubs are intended to be an experience where a facilitator from the credit union using online financial learning tools and practical experience relevant to the community meets with members and/or employees to encourage and support their efforts to save and become more financially literate. These meetings would be held in the credit union offices as frequently as the credit union deems appropriate.
There are two very important savers’ club meetings that relate specifically to tax time. The first meeting would be held just before tax time, perhaps in early January. This meeting is to inform the members just what to bring to a VITA site to complete a tax return (records, receipts, W-2s, etc). For those who have not yet set up an account, it is time to do that as well. Utilizing material from the online education, this session can be completed easily and quickly.
The second important meeting is held immediately following tax season as near to April 15th as is practical. The focus of this meeting is to get the feedback from participants. The invitees would include the club members who participated in the VITA experience as well as those who did not. We are most interested in having you record, in the most simple way, the experience as related by members of savings clubs. It is our expectation that participants will be proud of their ability to save for retirement and that the discipline also resulted in a tax benefit (Saver’s Credit).
COSTS AND PROCESS