IRS guidance helps DC plan sponsors cash in on small incentives 

March 27, 2024

 

Recent IRS guidance provides clarity for employers that want to give employees small financial incentives — such as gift cards — to encourage participation in 401(k) and 403(b) plans. Notice 2024-2 answers several key implementation questions about the SECURE 2.0 Act (Div. T of Pub. L. No. 117-328) provision letting employers provide these incentives, including confirmation that they are taxable to employees. However, the notice is silent on whether nonemployees, such as plan recordkeepers, can offer these programs.

The Internal Revenue Code’s (IRC’s) “contingent benefit rule” (IRC § 401(k)(4)(A)) prohibits employers from conditioning any benefit — other than matching contributions — on an employee’s decision to make or not to make elective deferrals to a 401(k) plan. The “universal availability requirement” of IRC § 403(b)(12)(A)(ii) similarly restricts 403(b) plans. SECURE 2.0 provides a new exception that allows offering de minimis financial incentives to encourage participation, as long as the payment isn’t made using plan assets. The notice clarifies several key implementation issues not addressed in the act.

Maximum incentive $250. SECURE 2.0 doesn’t specify a cap on the value of a de minimis financial incentive. In the notice, IRS sets the maximum at $250.

Limited to nonparticipating employees. The notice restricts these incentives to employees for whom “no election to defer under the [plan] is already in effect.” As a result, employers won’t be able to use these incentives to encourage participating employees to increase their contributions.

Incentives can be structured as installments. Athough incentives aren’t allowed for employees who are already deferring, employers may structure an incentive as a series of payments over multiple plan years, where future installments are contingent on an employee’s continuing to participate when the payment is made. In this case, the total amount of the payments can’t exceed $250.

May not be paid as matching contributions. The notice confirms that de minimis incentives can’t be paid as matching contributions under the plan.

Not subject to plan qualification rules. The notice confirms that de minimis incentives aren’t subject to the IRC Section 401(a) qualification rules. This means incentives won’t count toward annual plan contribution limits or factor into nondiscrimination testing. Nor will employers offering incentives have to comply with the minimum eligibility rules (i.e., employers could exclude long-term part-time workers).

Small financial incentives are taxable. Certain de minimis fringe benefits are excluded from an employee’s taxable income, but cash and cash equivalents are taxable unless they meet one of a few narrow exceptions (such as for occasional meal money or a gift certificate for a specific personal item of minimal value). The notice confirms that SECURE 2.0’s de minimis financial incentives are includible in employees’ income and, unless another IRC exception applies, are subject to tax withholding and reporting requirements.

The notice is silent on whether someone other than the employer — such as a plan’s recordkeeper — could provide these incentives to plan participants. However, RS has specifically asked for comments on this issue, which suggests the agency believes the statute has enough leeway to allow these incentives. Nonetheless, in the absence of specific IRS guidance, service providers may be hesitant to implement such a program.  

• Notice 2024-22 (IRS, Jan. 12, 2024)
• Div. T of Pub. L. No. 117-328, the SECURE 2.0 Act of 2022 (Congress, Dec. 29, 2022)

• User’s guide to SECURE 2.0 (regularly updated)
• SECURE 2.0 spurs DC plan participation with small incentives (Sept. 29, 2023)