By: Carolyn M. Cumbee, Esq.

On December 20, 2024, the Internal Revenue Service (“IRS”) released Notice 2024-2 (the “Grab Bag” guidance), which provided a Q&A format of guidance on certain provisions of the SECURE 2.0 Act of 2022 (“SECURE 2.0”). As we pick apart each grab bag goody, we are exploring certain topics more in-depth and also providing our insight on these points and highlighting what questions still remain.

Today, we will discuss the “de minimis” incentives for employees to defer, as outlined in SECURE 2.0 and for which the IRS just provided guidance in the Grab Bag.  Here’s how it may apply to your (or your client’s) qualified plan.

The Contingent Benefit Rule

Prior to SECURE 2.0, Section 401(k)(4)(A) stated that “a cash or deferred arrangement of any employer shall not be treated as a qualified cash or deferred arrangement if any other benefit is conditioned (directly or indirectly) on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash.” This rule was generally referred to as the Contingent Benefit Rule.  Ultimately, the rule gave no wiggle room for employers to provide any incentive for employees to make a deferral election in their 401(k) plan, other than potentially receiving a matching contribution (which was an exception outlined in Section 401(k)(4)(A)).  The Contingent Benefit Rule also applies (although in a more circuitous manner) to 403(b) plans through Section 1.403(b)-5(b)(2) of the Treasury Regulations.

Enter SECURE 2.0

Section 113 of SECURE 2.0 amended both Code Sections 401(k)(4)(A) and 403(b)(12)(A) to provide that a “de minimis” financial incentive may be provided to employees who elect to defer into the 401(k) or 403(b) plan. The financial incentive, however, cannot be paid for by plan assets.  This de minimis rule is considered an exception to the Contingent Benefit Rule.

Additionally, SECURE 2.0 Section 113(c) amended Section 4975(d) of the Code, by exempting the de minimis financial incentive from the tax on prohibited transaction.

The law did not define what constituted a “de minimis” incentive.  In the legislative history for SECURE 2.0, the Committee noted that gift cards in small amounts would fall under this “de minimis” standard. They highlighted that individuals are highly motivated by immediate financial incentives, as opposed to a matching contribution, which could be considered a long-term incentive.

These rules became effective immediately after the date of enactment of SECURE 2.0 on December 29, 2022.

Reaching into the Grab Bag

In Notice 2024-2, the IRS clarified that its idea of a de minimis incentive is one that does not exceed $250 in total value. A financial incentive may be in the form of installments (for example, a $100 payment with the participant’s first deferral election, and a second payment of $100 if the participant is still deferring after 6 months in the Plan), but we need to look at the total value of the installments to ensure it is less than the $250 limit.

Also, it is important to note that the de minimis exception would not apply to employees who are already deferring to the plan. Therefore, if you are interested in offering a small gift card to employees who increase their deferral election, don’t do it; this arrangement would violate the Contingent Benefit Rule.

In summary, a de minimis financial incentive won’t violate the Contingent Benefit Rule if:

• It does not exceed $250 in total value;
• It is in lump sum or installment form;
• It applies only to participants without a current deferral election.

The IRS also clarified that these financial incentives may not be paid by the plan.  As such, they are not subject to Code rules for the contributions, like Section 415, nondiscrimination testing, and top-heavy. Likewise, they are not subject to the deduction limits for plan contributions under Code Section 404.

The financial incentives – particularly those that are cash or cash equivalents – are still considered to be taxable income for withholding and reporting requirements, unless they satisfy another exemption under the Internal Revenue Code (such as the fringe benefit exclusions).

Some Remaining Questions

Some might argue that this $250 threshold is an easy black and white line to identify and comply with.  However, what if it isn’t so black and white? How would the IRS handle the following scenarios:

• What about a raffle for a $700 iPad with only 1 winner? On average, the financial incentive may be under $250 per person, but one lucky employee will receive a value of $700.
• What about a $10 scratch-off lottery ticket? At face value, it may appear to fall within the exemption, but what if one lucky employee wins $500?
• How about an extra day of PTO? For some employees, that value may be measured at less than $250, but the day may be much more valuable to other employees if it is determined to be equivalent to one day’s rate of pay. Is that the correct measurement of the day’s value?

Clearly, employers have an easy way to stay within the $250 value limit. They can avoid the gray areas by simply offering a cash sum or gift card of $250 or less.

If you have any questions about de minimis incentives, let us know.  After all, we are your ERISA solution!

Note from the Editor:

FBLC Comments on Proposed LTPT Regulations

On January 26, 2024, FBLC submitted a comment letter to the Treasury Department regarding the proposed regulations relating to the coverage of Long Term Part-Time Employees in 401(k) and 403(b) plans.  This is the first time that FBLC has submitted comments on regulations to the government, but we believe that there are significant practical concerns regarding this guidance.  You can read our comments here.