Limited assets: most states have regulations that shut out low-income workers from retirement savings.

Millions of working poor who rely on food stamps, Medicaid and other forms of public assistance are liquidating their savings or abstaining from employer-sponsored retirement plans in order to meet average state guidelines limiting household savings to $3,000 or less.

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Low-income workers hit hardest by household savings limits in 47 states live near the $16,090 and $19,350 federal poverty lines for families of three and four, respectively. These workers often decline access to 401(k) plans offering matching funds to protect their benefits.

Public policy experts and non-governmental groups say many household asset tests, which vary from state to state, were designed to prevent low-income families from gaming the system but are now hindering many working poor from transitioning into middle class by accumulating emergency funds or retirement nest eggs. Instead the laws require many low-income workers receiving public assistance to deplete their savings and avoid setting aside discretionary income.

"If you did have a 401(k) and have anything close to the amount of savings that could sustain you in retirement, it would be well over the asset limit," said Zoe Neuberger, a senior policy analyst at Center on Budget and Policy Priorities, a Washington D.C.-based research group. "People who work in the retirement savings side of things are completely shocked when they see these rules because they run completely counter to promoting saving for retirement."

Contrary to popular misconceptions stereotyping low-income workers as poor savers, research suggests the opposite is true. Ben Mangan, president of Earned Assets Resource Network, a San Francisco-based non-profit that helps the working poor accumulate assets for home purchases and starting small-businesses, said during the past three years 1,000 area residents who participated in EARN programs managed to save 5.5 percent of their gross incomes. "There is a common misperception that working poor make poor economic choices," Mangan said. "But when poor people have an incentive to save, they do so at higher rates than national savings rates."

Some of the most stringent state asset testing guidelines predate a national shift to 401(k) from defined benefit plans dating back more than 20 years. The retirement landscape has evolved in recent years but benefits guidelines have largely remained the same. Older defined benefit plans were largely funded directly by companies and accumulated wealth for pensioners without inflating personal balance sheets eyed by state benefits administrators.

By comparison, savings in newer defined contribution retirement programs, such as 401(k) plans and individual retirement accounts, are debited from employees' paychecks and often count toward average $2,000 to $3,000 household savings limits used to determine eligibility for family Medicaid benefits in 23 states. Colorado, Nevada and Tennessee set $2,000 Medicaid eligibility household savings limits that include defined contribution plans; Arkansas and New Hampshire have $1,000 limits.

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A minimum wage worker who sets aside $50 per month toward a 401(k) with an employer match during a rising market potentially jeopardizes family Medicaid eligibility within two years, according to Dory Rand, an attorney for the Chicago-based Sargent Shriver National Center on Poverty Law. "Millions of people who rely on means-tested programs are often discouraged from investing. If these asset limits were exempted, millions could benefit and increase their financial security," Rand said.

Establishing a national headcount of working poor who are subject to state asset testing guidelines is difficult because public assistance guidelines differ between states. Of the 51.5 million Medicaid recipients last year, 13.3 million were neither elderly nor disabled, which suggests the number of able-bodied adults who are now required to maintain low household savings levels in order to have health coverage could be in the millions, Neuberger said. Food stamps, a subsidy for families living on the poverty line, also frequently come with a $2,000 to $3,000 household savings limit.

Newer welfare-to-work programs also require candidates to divest significant personal savings before applying for benefits. Jennifer Thompson, a 41-year-old single mother looking for work in San Francisco, was declined by CalWORKs--California's diversified welfare-to-work program offering child care, vocational training and cash living subsidies--because she refused to cash in her nest egg, a small stock portfolio valued at roughly $7,000. "It's all I have if something happens to me," Thompson said. "They said if I spent that and fall within the criteria of $2,000 or less I'm welcome to reapply."

At the same time some national brokerage firms that also sell retirement plans are flexing their lobbying muscle in Washington to back pension reform legislation that enables companies to automatically enroll employees in 401(k) plans. The proposed automatic enrollment provisions come with escape clauses allowing workers to opt out of their 401(k) plans, but the legislation fails to address state-mandated household savings guidelines threatening individuals who accumulate modest sums.

Charles Schwab & Co. and Fidelity Investments, two of the largest 401(k) providers known to maintain public policy departments and staff lobbyists, said state guidelines preventing low-income families from saving are not a priority at this time.

Schwab releases an annual report, the Black Investor Survey, which perennially reveals that Black households with at least $50,000 yearly income own disproportionately fewer investments than white households in the same income bracket. Low-income household savings limits, which disproportionately affect people of color, according to Rand, are not factored into the survey's methodology.

"In past Ariel-Schwab surveys, we have found that the key barriers to investing are lack of education and lack of access. In our most recent survey, we identified the workplace as an important venue to help African Americans become more familiar with retirement planning and investing for the future," said Lindsay Tiles, a Schwab spokeswoman. Large firms avoid issues involving working poor because smaller 401(k) accounts are typically more costly to manage and widely considered nuisances, said Diane Swonk, chief economist at Mesirow Financial, a Chicago-based diversified financial services firm managing $25 billion.

Ironically, wealthier workers who earn more than $90,000 per year are also being harmed by low household savings caps that deter entry-level employees from participating in defined contribution plans. Government discrimination tests (that plans must file annually) lower the amounts that highly compensated executives can contribute if most rank-and-file workers opt out. As a result, third-party administrators who market pension plans and cater to wealthy individuals have a vested interest in increasing participation rates among the working poor.

"It's not just altruism because we want low-paid people in the plan. The more lower-paid workers we can get, the higher-paid workers are less likely to end up getting refunds," said Bud Green, a 401(k) consultant at Santa Monica, Calif.-based Fortress Wealth Management, a third-party administrator. "Lowly paid workers putting in small amounts really help out with discrimination testing."

Eric Baum is a journalist who lives in New York and writes for Institutional Investor News.