SECURE 2.0 Provides New Financial Incentive Option for Encouraging Employee Participation
By Kristoffer Aas, EdM
Today, many employers offer long-term incentives, such as employer matching contributions, to boost participation in their retirement plans. But, as of plan years beginning after December 29, 2022, a small immediate financial incentive can also be offered to entice those not deferring in their employer’s 401(k) or 403(b) plan to start contributing to the plan. Inevitably, this has generated questions—the most popular of which we will answer here.
What is the maximum value of a small immediate financial incentive to be qualified as “de minimis” and are there any restrictions to its use?
A small immediate financial incentive can only be considered de minimis if the value does not exceed $250 dollars. It cannot be paid with or derived from plan assets, and it cannot be an employer matching contribution.
Must a de minimis financial incentive be a gift card?
No. While previous legislation mentioned “gift cards in small amounts” as a specific example of an acceptable incentive for boosting employee participation in their employer’s retirement plan, SECURE 2.0 does not define “de minimis” in a manner that limits the incentives to gift cards.
Must a de minimis financial incentive be a one-time gift only?
No, it can also be made on an installment basis. For example, a plan sponsor could offer a $100 dollar gift card to any employee who makes an election to defer within the next 90 days, with a promise to provide an additional $100 dollar gift card next year, but only if the employee continues to defer at that later date.
How is a de minimis financial incentive taxed and reported?
Certain de minimis financial incentives qualify for an exception under Treasury Regulation 1.132-6 and are excludable from taxable income. Some examples include occasional cocktail parties or group meals for employees; inexpensive birthday or holiday gifts given as property and not cash; occasional tickets to sporting events or the theater; flowers; or occasional use of an employer’s copy machine.
Financial incentives provided by an employer, however, are generally treated as taxable wages and are subject to the applicable withholding and reporting requirements for employment tax purposes. For example, a gift card is considered a cash equivalent, so it is includable in the employee’s taxable income and is a taxable fringe benefit for employment tax and reporting purposes unless another exception applies.
Clients should consult with their CPA or other competent tax professional to determine if an exception applies.
