Would You Like a Latte With that 401(k) Deferral?

SECURE 2.0 Permits Small Financial Incentives to Encourage Plan Enrollment

Effective immediately under a provision of the recently-passed SECURE 2.0 retirement reform legislation, employers may offer their employees gift cards or other “de minimis financial incentives” for enrolling in a 401(k) plan.  This post sets forth some compliance points for this new incentive opportunity.

  • Under prior law, matching contributions were the only means by which employers could encourage employees to make elective deferrals. 

Expanding access to retirement plans is one of the overriding goals of SECURE 2.0 (set forth in Division T of the Consolidated Appropriations Act, 2023).  Many employers would like to be able to encourage employees to save for retirement but may not be able to afford an ongoing employer matching contribution.  Section 113 of Division T expands the list of permitted employer incentives by allowing employers to provide a small financial incentive to employees to enroll in a 401(k) plan.  The small incentive may be just enough to get the ball rolling for employees who are otherwise not inclined to take part in a 401(k) plan.

  • The small financial incentive must be paid for by the employer, not the plan itself.

Section 113 makes clear that the employer that sponsors the plan must purchase the gift cards or other small financial incentives.  Plan assets may not be used for this purpose.

  • The gift cards or other small financial incentives will constitute taxable income to employees.

Employer-provided gift cards and other items with a clear cash value are treated as cash for income and employment tax purposes.  The “de minimis fringe” exception that may apply to a water bottle or t-shirt provided to employees does not apply to items with a readily ascertainable cash value.  (See 2023 Publication 15-B, p. 9) If your 401(k) plan’s definition of compensation for contribution purposes does not exclude gift cards, the gift cards are also “compensation” for plan contribution purposes.

  • Keep the dollar amount of the incentive small. 

There is no safe harbor amount for “de minimis” value, and the determination depends upon the facts and circumstances.  A $10 or $15 gift card probably satisfies the standard and will buy an employee a couple of cups of free coffee or a smoothie or two. Consult a qualified tax advisor if you are considering a more generous incentive.

  • Coordinate with your recordkeeper and third-party administrator on rolling out this feature.

You will need to coordinate with your plan recordkeeper and your third-party administrator to coordinate the small financial incentive with plan enrollment.  Think about how and when you will communicate this benefit to employees and about when and how you will deliver the financial incentive in connection with proof of enrollment in the plan.  It might be a good idea to draft out a timeline for a hypothetical new enrollee, and walk through it with your recordkeeper and third-party administrator before you unveil it to employees.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2023 Christine P. Roberts, all rights reserved.

Photo credit: Tye Doring, Unsplash