- Prior to the SECURE Act 2.0 the only financial incentive for a participant to make a deferral was a matching contribution.
- However, the new law permits “de minimus” non-cash incentives for beginning participation or increasing deferrals, so long as the incentives are not paid for by the plan.
- This change will allow plan sponsors to use gamification to encourage eligible employees to defer into a plan or to increase deferrals.
The President signed the Consolidated Appropriations Act, which included SECURE Act 2.0, on December 29, 2022.
SECURE Act 2.0 has over 90 provisions, some major and some minor; some mandatory and some optional; some retroactively effective and some that won’t be effective for years to come. One difference between the SECURE Act 2.0 and previous retirement plan laws is that many of 2.0’s provisions are optional…that is, plan sponsors are not required to adopt the provisions, but can if they decide that the change will help their plans and participants. This series discusses the provisions that are likely to be the most impactful, either as options or as required changes.
This article discusses a new provision to allow small financial incentives for participants to encourage them to make deferrals to a plan. The provision is already effective, so plan sponsors can, if they want, implement the use of these incentives now.
The Senate Finance Committee summarized the provision as:
Section 113, Small immediate financial incentives for contributing to a plan. Under current law, employers may provide matching contributions as a long-term incentive for employees to contribute to a 401(k) plan. However, immediate financial incentives (like gift cards in small amounts) are prohibited even though individuals may be especially motivated by them to join their employers’ retirement plans. Section 113 [of the Act] enables employers to offer de minimis financial incentives, not paid for with plan assets, such as low-dollar gift cards, to boost employee participation in workplace retirement plans by exempting de minimis financial incentives from section 401(k)(4)(A) and from the corresponding rule under section 403(b). Section 113 is effective for plan years beginning after the date of enactment of this Act [which was December 29, 2022].
As the summary says, financial incentives for participants to make deferrals, other than matching contributions, were not permitted in the past. However, the section of the Internal Revenue Code that include that provision was amended by SECURE 2.0 to add the language: “(other than a de minimus financial incentive (not paid for with plan assets) provided to employees who elect to have the employer make contributions under the arrangement in lieu of receiving cash)”.
For readers who are not tax techies, this will help you better understand the language:
- The reference to “in lieu of receiving cash” is to having money taken out of the participant’s paycheck for a deferral. In other words, the “in lieu of” just means that the small financial incentive can be for encouraging defers out of the participant’s paycheck.
- A financial incentive can be a gift or award. But it seems clear that it cannot be cash or cash equivalents.
- “De minimus” is not defined in the statute, and we will need more guidance from the IRS. But its dictionary meaning is: “lacking in significance or importance”. Well, that’s not particularly helpful, is it? While we have to wait for IRS guidance, we can at least look to gamification in wellness programs where employees can earn points and then redeem them for merchandise from a catalogue. (There are providers for gamification programs, who have catalogues with the types of gifts that can be offered and who can help structure the programs.) I think most people would agree that a gift worth $25 or $50 would, in that context, be de minimus. But we don’t know for sure where the line will be drawn.
So, what does this mean? From my perspective, it means that employers can use gamification to encourage employees to join a deferral-based plan (e.g., 401(k) or 403(b) plan) and to further encourage them to increase their deferrals. The first employers to use this technique will likely be those who are already using gamification for the wellness programs. After that, it will likely become more commonplace, particularly among mid-sized and larger plans. In effect, it allows the use of games and contests to improve outcomes for participants. The combination of fun and saving is not all bad.
While new deferral-based plans will be required to automatically enroll and increase deferrals, existing plans will not be. If a plan sponsor isn’t required to have an “automatic plan” and doesn’t want to design it plan that way, this provision offers a new way to increase participation and deferrals without automatically enrolling employees.
Even for automatically enrolled plans, and particularly for those that don’t use automatic deferral increases, gamification could help participants increase their retirement savings.
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