Under the SECURE 2.0 Act, employers are now permitted to offer small financial incentives—such as gift cards—to encourage employees to begin participating in 401(k) or 403(b) retirement plans. This provision, effective for plan years starting after December 29, 2022, introduces specific rules and limitations:
Key Rules and Limitations
- Maximum Value: The incentive must be “de minimis,” defined by IRS Notice 2024-2 as not exceeding $250 in total value. This amount can be provided either as a lump sum or in installments, provided the cumulative value does not surpass $250.
- Eligibility: Only employees who are not currently making elective deferrals to the plan are eligible for these incentives. Employees already participating in the plan cannot receive these incentives, even if they choose to increase their contributions.
- Funding Source: The incentive must be paid by the employer using non-plan assets. It cannot be funded through the retirement plan itself or structured as an employer matching contribution.
- Tax Implications: These incentives are considered taxable income to the employee and are subject to standard income and employment tax withholding and reporting requirements, unless they qualify for another specific tax exclusion.
- Plan Qualification: Since these incentives are not treated as plan contributions, they are not subject to retirement plan qualification rules, contribution limits, or nondiscrimination testing.
Practical Considerations
Employers can structure these incentives in various ways, such as offering a $100 gift card upon initial enrollment and an additional $100 after six months of continued participation, ensuring the total does not exceed the $250 limit. However, offering incentives like raffles or prizes with values exceeding $250 per individual may not comply with the “de minimis” standard and could raise compliance concerns.
Before implementing such incentive programs, it’s advisable to consult with legal or tax professionals to ensure compliance with all applicable regulations and to address any potential complexities.
