incentives to defer?

[Guest MES]

I have a client who wants to increase participation in the company 401(k) plan by offering incentives such as gift certificates, bonuses, etc. I have suggested making the match more attractive, but she feels that will not work. She'd like to do something "outside the plan."

I don't think this is a good idea, but am having trouble dissuading her. She also wants to take a tax deduction for the incentives. I have told her these would not be deductible as a plan expense, but she may deduct as a business expense.

Has anyone encountered this? Any suggestions?

[stephen]

While it is nice the employer wants to offer incentives outside of the plan to encourage participants to defer it is not deductible within the plan.

I agree with your suggestion to increase the matching benefit as encouragement to improve participation. Perhaps the participation would increase with a better communication program showing the participants the power of the increased matching contribution along with compound interest.

[mbozek]

Under IRC 102 © anything given to an employee by an employer will be taxable income which must be reported to the IRS unless there is a statutory exception, e.g., fringe benefit. The payments to the employees will be deductible by the employer.

[KJohnson]

Also, look at this section of the k regs:

(6) Other benefits not contingent upon elective contributions--(i)

General rule. For plan years beginning after December 31, l988, or such

later date provided in paragraph (h) of this section, a cash or deferred

arrangement satisfies this paragraph (e) only if no other benefit is

conditioned (directly or indirectly) upon the employee's electing to

make or not to make elective contributions under the arrangement. The

preceding sentence does not apply to any matching contribution (as

defined in section 401(m)) made by reason of such an election or to any

benefit that is provided at the employee's election under a plan

described in section 125(d) in lieu of an elective contribution under a

qualified cash or deferred arrangement.

(ii) Definition of other benefits. Other benefits include, but are

not limited to, benefits under a defined benefit plan; nonelective

employer contributions under a defined contribution plan; the

availability, cost, or amount of health benefits; vacations or vacation

pay; life insurance; dental plans; legal services plans; loans

(including plan loans); financial planning services; subsidized

retirement benefits; stock options; property subject to section 83; and

dependent care assistance. Also, increases in salary and bonuses (other

than those actually subject to the cash or deferred election) are

benefits for purposes of this paragraph (e)(6). The ability to make

after-tax employee contributions is a benefit, but that benefit is not

contingent upon an employee's electing to make or not make elective

contributions under the arrangement merely because the amount of

elective contributions reduces dollar-for-dollar the amount of after-tax

employee contributions that may be made. Benefits under any other plan

or arrangement (whether or not qualified) are not contingent upon an

employee's electing to make or not to make elective contributions under

a cash or deferred arrangement merely because the elective contributions

are or are not taken into account as compensation under the other plan

or arrangement for purposes of determining benefits

[Guest ActuaryWannabe]

I was involved in a situation where there were prize drawings based on who attended an enrollment meeting and turned in an election form, even if the election was not to participate.

[Jon Chambers]

Other possible techniques include hugely frontloaded matching--e.g., 200% match on the first $100 deferred--or flat "starter" contributions--e.g., $100 contribution when an enrollment form is returned. Although these structures may introduce possible testing issues, they are generally not discriminatory, and typically meet the objective of getting a participant into the plan without institutionalizing higher matching costs.

[401 Chaos]

I'm not really a fan of this but they might also consider implementing a negative election (automatic enrollment) for those that do not affirmatively opt out of participation.

[Kirk Maldonado]

Jon Chambers:

If I were eligible to participant in such a plan I would drop out every even month and re-enroll in every odd month. I'd receive a great rate of matching contributions!

[Jon Chambers]

Kirk, you sly son of a gun! I presume that a plan sponsor implementing a frontloaded matching structure would engage a competent attorney (such as yourself) to ensure that plan provisions provided for the frontloaded match on inital enrollment only.

Thanks for giving me a smile!

[Guest saber]

Here is an article dealing with the same problem the original poster's client is facing:

http://www.workforce.com/section/02/featur...7/26/index.html