This question comes up periodically: do amounts an employees’ puts into IPERS – the Iowa Public Employees Retirement System — count towards the retirement savers credit?
The short answer is no, because IPERS is a defined benefit plan, not a defined contribution plan — even though employees do make contributions to IPERS.
Head spinning yet? Let’s dig a little deeper and try to clear it up.
Retirement Savers Credit
First, let’s define what the retirement savers credit is.
Tax law (in Code Section 25B) provides for a non-refundable tax credit to people whose income is below certain limits and who make contributions to a retirement account. For example, a single person with income of $30,000 receives a credit of 10% of their contributions, up to a maximum of $2,000 of credit. (For the full list of income ranges and credit amounts, see the chart on Form 8880.)
Employees of the State of Iowa are required to contribute to IPERS. The amount the employee is required to contribute is set by law. The contribution reduces the employee’s taxable income in much the same way as a contribution by an employee to a 401(k) plan.
But — and here’s the key with the retirement savers credit — IPERS is not a 401(k) plan.
Application of IPERS to the Credit
If we look more closely at what the law says about the retirement savers credit, we see that the law says elective deferrals count toward the credit. Code Section 25B(1)(d) (my emphasis added in bold):
The term “qualified retirement savings contributions” means, with respect to any taxable year, the sum of—
(A) the amount of the qualified retirement contributions (as defined in section 219(e)) made by the eligible individual,
(B) the amount of—
(i) any elective deferrals (as defined in section 402(g)(3)) of such individual, and
(ii) any elective deferral of compensation by such individual under an eligible deferred compensation plan (as defined in section 457(b)) of an eligible employer described in section 457(e)(1)(A),
(Note: the reference to Section 219(e) refers to Individual Retirement Accounts [IRAs].)
IPERS contributions are not elective — if you’re a public employee in Iowa, your contribution is required. You get a deduction for the contribution, same as with a 401(k) contribution. But the difference is, the IPERS contribution is required, while the 401(k) contribution is considered “elective.”
Additionally, the IPERS contributions fall under Section 414(h)(2). This section says contributions to a plan such as IPERS are deductible from employee wages but the contributions are considered employer contributions rather than employee contributions and so — again — they are not elective employee contributions that would qualify for the retirement savers credit.