SECURE 2.0 spurs DC plan participation with small incentives 

September 29, 2023

Defined contribution (DC) plan sponsors have a new way to encourage employee participation. The SECURE 2.0 Act of 2022 (Div. T of Pub. L. No. 117-328) allows sponsors to offer employees small financial incentives — like gift cards — for making contributions to Internal Revenue Code (IRC) Section 401(k) and 403(b) plans. Although this provision is effective for plan years beginning after Dec. 29, 2022, sponsors may hesitate to offer these incentives without agency guidance.

SECURE 2.0 lets employers pay de minimis financial incentives for plan participation without running afoul of the IRC’s “contingent benefit rule.” That rule prohibits directly or indirectly conditioning any benefit — other than matching contributions — on an employee’s decision to make or not to make elective deferrals to the plan. However, employers must use their own funds to pay these incentives: The act prohibits using any plan assets (e.g., forfeitures) for this purpose.

This SECURE 2.0 provision also makes the following related statutory changes:

• Adds new prohibited transaction exemptions to ERISA Section 408 (29 USC § 1108) and IRC Section 4975 for payment of these incentives
• Amends the 403(b) universal availability rule (IRC § 403(b)(12)(A)(ii)) to confirm that paying small incentives won’t violate the special nondiscrimination requirements for salary-reduction arrangements

Sponsors wishing to offer small incentives for DC plan participation may find themselves contending with questions unaddressed by the brief statutory provision. Agency guidance might help resolve the following concerns:

• Dollar threshold not specified. The Senate Finance Committee’s summary of the new law explains that this exception allows employers to provide incentives “such as low-dollar gift cards,” but the act doesn’t establish a dollar threshold for incentives to qualify as de minimis. Without a concrete cap, some sponsors may be unwilling to offer these incentives.
• Conditions for incentive payments. SECURE 2.0 doesn’t explain whether employers can set conditions for small incentives. For instance, could an employer require employees to elect a minimum contribution percentage or amount to receive the incentive or exclude certain groups of eligible employees?
• Other incentive providers. The Senate Finance summary implies that this provision is aimed at employers that want to provide incentives to employees. But the legislative language doesn’t specify that only employers can offer the incentive. Could the plan’s recordkeeper provide small incentives instead?
• Taxation. These incentives presumably would follow the existing rules for employer-paid cash and cash equivalent fringe benefits, which are generally taxable as wages to employees, no matter how small the amount.

• Div. T of Pub. L. No. 117-328, the SECURE 2.0 Act of 2022 (Congress, Dec. 29, 2022)
• Section-by-section summary of the SECURE 2.0 Act of 2022 (Senate Finance Committee, Dec. 19, 2022)

• User’s guide to SECURE 2.0 (regularly updated)