Contest

[Guest koolkidd]

Is there anything improper, illegal, or discriminatory about giving away a prize to an employee who enrolls in our 401(k) plan by a particular date? I would send enrollment kits to all eligible non-highly compensated employees who are not currently enrolled in the plan. Those who complete and return an enrollment form to me by a specified date would be enrolled in the plan and entered in a drawing to win a prize like a digital camera. I found one at Circuit City for $99.99. The value of the prize would be somewhere in that ballpark.

[could be me maybe not]

It is fine as far as I know. I had a client who did a raffle in a similar situation. Nobody raised any flags then.

[david rigby]

I'll guess that current NHCE participants will be resentful of this.

Have you considered the alternative of default enrollment?

[mbozek]

Doesnt reg 1.401k-1e(6) prohibit use of other benefits as a condition to making or not making electve deferrals?

[austin3515]

Nice one mbozek! There's always something. I read through the long list of benefits specifically prohibitted, and none of the seemed remotely similar to this. This sounds like the kind of thing the IRS might like, I would think? IF the goal is to get American's to save more, this seems like a harmless way to encourage savings...

Maybe a private letter ruling is in order? Kidding, of course...

[Kirk Maldonado]

Not so fast.

The way I read the post, the person only had to sign the enrollment form, not actually make any contributions. Thus, a person who turned in the form could be eligible for the contest even if they revoked their contribution election prior to any contributions actually being withheld from their pay.

In that case, I'm not so sure that there is a contingent benefit issue.

[MoJo]

The way I've always seen this done is to offer an entry into the contest absent any other action (but offer an automatic entry into the contest if you enroll). Actually, what I've seen work best is to offer an entry for attendence at a voluntary meeting (or one-on-one session). Get 'em in the room, and you have a better chance of enrollment....

[Guest koolkidd]

So, consider this alternative arrangement:

(1) HCEs and NHCEs who currently contribute to the plan are automatically entered in the drawing.

(2) Participants suspended for hardship withdrawals are entered also.

(3) Eligible employees who enroll AND make contributions by 6/30 are entered also.

(4) Participants making loan repayments must have contributed at some point, so they will be entered also.

(5) Eligible employees who have never contributed to the plan and have not agreed to contribute by 6/30 are the only active employees not entered in the drawing. Terminated employees with and without balances in the plan are not entered in the drawing.

This satisfies more employees, but eligibility for the drawing and ulimately a prize is still contigent upon making contributions to the plan (not just signing a form and agreeing to make them). Contributing, of course, is the whole point. What I am gathering from this string is that a contingent benefit is a no-no. In that case, I think connecting contest entry to meeting attendance is the best I can do. I think the IRS has issued guidance permitting banks to give toasters away for people opening up IRAs, but I need to see if, how, and to what degree the conclusion for IRAs translates to 401(k) plans.

[Kirk Maldonado]

If my memory is right, and it often isn't, I think it was a prohibited transaction class exemption issued by the DOL, circa 1993?

[KJohnson]

You might want to look here:

http://benefitslink.com/boards/index.php?s...t=0entry23072

The "toaster" class exemption, 93-1, that Kirk refers to, if I recall, only applies to IRA's and any other non-ERISA plan. This was because for purposes of 4975 the owner of an IRA is generally considered a fiduciary and if the bank gives him or her a toaster for opening an account, the person is arguably using "plan assets" for his or her own benefit. My recolleciton was the exemption specifically excludes plans covered under ERISA.