Late last month on December 20th, the IRS issued IRS Notice 2024-2 (“Notice”), an 81-page set of Q & A guidance that provides much needed information on how to comply with several law changes within the SECURE 2.0 law that President Biden signed into law in December of 2022. This Blog Post discusses the portion of the IRS guidance relating to the law change in Section 113 of SECURE 2.0, which now allows employers to reward employees with “small immediate financial incentives” for starting to contribute to a 401k or 403b plan. Section 113 is especially noteworthy since it marks the first time after 1988 (when Section 401(k(4)(A) of the Internal Revenue Code (“Code”) became effective) that employers can condition the receipt by employees of additional benefits (besides matching contributions) depending on whether the employees contribute to the employer’s 401k plan.
The IRS Notice is surprising in a number of ways, not the least of which is the IRS’s view that a financial incentive can be worth as much as $250 and still qualify as “de minimis.” (Prior to the IRS guidance, most practitioners generally thought “de minimis” as being somewhere in the $25-$100 range.) The IRS Notice gives employers the information they need to know should an employer wish to provide employees with this reward for signing up and contributing into the employer’s 401k or 403b plan. It was particularly important for the IRS to get this guidance out as soon as possible because the law change permitting de minimis financial incentives (“De Minimis Financial Incentive”) became effective last year. (We suspect most employers who were interested in offering its employees this type of financial incentive chose to wait until the IRS came out with its guidance before moving ahead with announcing this incentive program to its employees.)
Here is what the IRS has to say in its 6 Q & A’s in the Notice about the rules relating to De Minimis Financial Incentives offered by employers to employees who elect to contribute to the employer’s 401k or 403b plan:
- An allowable De Minimis Financial Incentive cannot exceed $250 in value – A financial incentive offered by the employer is a De Minimis Financial Incentive” that is permitted under the 401k and 403b legal requirements ONLY if it does not exceed $250 in value.
- A De Minimis Financial Incentive can only be paid to an employee who is not already contributing into the 401k or 403b plan – Employees who are already making contributions into the 401k or 403b plan are NOT eligible to receive the financial incentives. The IRS guidance makes it clear that employees who are already making contributions into the plan are not eligible to receive the De Minimis Financial Incentive that SECURE 2.0 now permits. The IRS guidance, therefore, would not allow an employer to offer a De Minimis Financial Incentive to employees who decide to increase their deferral percentages. If an employer did offer such a financial incentive to employees who are already making deferrals into the 401k or 403b plan, then the employer’s plan would no longer be a qualified cash or deferred arrangement.
- An employer may pay the amount of the De Minimis Financial Incentive to eligible employees in installments – This means that an employer may split its De Minimis Financial Incentive into two or more installments (e.g., a $250 financial incentive is payable in the form of 2 installments in the amount of a $125 gift card) and the Notice provides that the employer is permitted to require that in order for the employee to receive the second gift card installment, the employee must be contributing into the 401k on the applicable future date (e.g., one year later). According to the IRS, an employee who is not contributing into the 401k or 403b plan at the time the financial incentive promise is announced may receive two $125 gift cards, and the incentive would still qualify as a permitted De Minimis Financial Incentive. For example, an employee might qualify for the fist installment but not the second one, if he or she is not actually contributing into the plan at the time of the second gift card payment.
- A matching contribution by the employer under the plan’s terms is never considered a de minimis financial incentive– If the employer’s 401k or 403b plan contains a matching contribution feature, then the employees who receive the match are not considered to be receiving a De Minimis Financial Incentive.
- The employer’s payment of a De Minimis Financial Incentive to eligible employees is NOT considered a plan contribution to the employer’s 401k or 403b plan. Accordingly, these payments are not subject to any of the qualified plan rules that otherwise apply to plan contributions, such as nondiscrimination, minimum coverage, the annual maximums, deduction timing or other qualified plan limits. This would mean, for example, the employer would not have to offer the same financial incentive to all of its non-participating employees or extend the offer to all of its non-participating employees should it not wish to do so.
- The employer payment of a De Minimis Financial Incentive (e.g., a gift card) is generally going to be taxable income to the employee who receives it. The De Minimis Financial Incentive would be treated as taxable remuneration that is includible in the employee’s gross income as wages, and is subject to applicable income tax withholding, and FICA and Medicare taxes. In this sense the De Minimis Financial Incentive payment is treated as if it were a cash payment payable through the employer’s payroll system to the employee. But as noted by the IRS, if the De Minimis Financial Incentive would separately qualify under another section of the Code (such as Section 132(a)(4)) that excludes certain types of employer-paid de minimis fringe benefits of property and services from the employee’s taxable income, then the De Minimis Financial Incentive would in that event be a non-taxable fringe benefit. Note that under Section 132(e) and the applicable IRS regulations, giving employees gift cards is always taxable, since the IRS views gift cards as equivalent to cash.
Questions or Assistance?
If you have questions about this Post or would like our assistance in ensuring your De Minimis Financial Incentive complies with the SECURE 2.0 law, please contact Richard Cohen at (860) 251-5803, or any other member of the Employee Benefits Practice Group.