incentive to defer - raffle

[SheilaD]

This is a new one to me. My client can no longer make a match and has discontinued it with all proper notices, amendments etc. Of course, between that and the economy, deferral's dropped. He would like to hold an annual raffle for non-highly compensated employees who defer into the plan for some prizes as an incentive to defer. He might raffle monetary prizes (1,000 to the first person picked from the hat) or he might buy some prizes (a WII, or IPOD).

My suspicion is that this may not be allowed but am curious as to your (collective) thoughts. thank you.

[david rigby]

A few prior discussions. Try using the Search feature, with keyword "raffle".

[MARYMM]

This is a new one to me. My client can no longer make a match and has discontinued it with all proper notices, amendments etc. Of course, between that and the economy, deferral's dropped. He would like to hold an annual raffle for non-highly compensated employees who defer into the plan for some prizes as an incentive to defer. He might raffle monetary prizes (1,000 to the first person picked from the hat) or he might buy some prizes (a WII, or IPOD).

My suspicion is that this may not be allowed but am curious as to your (collective) thoughts. thank you.

If you determine that it is allowed, don't forget that the fair market value of the prize is taxable income for the employee

[Guest Sieve]

And, since the raffle prize is included in compensation, I would say that the raffle would cause the 401(k) not to be considered to contain a "qualified" CODA (Treas. Reg. Section 1.401(k)-1(a)(4)(i)), with its normal consequences----as was suggested in one of the earlier "raffle" strings--as a result of Treas. Reg. Section 1.401(k)-1(e)(6), specifically the statement in -1(e)(6)(ii) that includes "cash remuneration" as a benefit which cannot, in the words of -1(e)(6)(i), be "conditioned . . . on the employee's electing to make or not make elective contributions."

[SheilaD]

A few prior discussions. Try using the Search feature, with keyword "raffle".

That will teach me -- I tried to search on incentive!

Thanks

[SheilaD]

And, since the raffle prize is included in compensation, I would say that the raffle would cause the 401(k) not to be considered to contain a "qualified" CODA (Treas. Reg. Section 1.401(k)-1(a)(4)(i)), with its normal consequences----as was suggested in one of the earlier "raffle" strings--as a result of Treas. Reg. Section 1.401(k)-1(e)(6), specifically the statement in -1(e)(6)(ii) that includes "cash remuneration" as a benefit which cannot, in the words of -1(e)(6)(i), be "conditioned . . . on the employee's electing to make or not make elective contributions."

Thank you - that makes sense.

S.

[austin3515]

(6) Other benefits not contingent upon elective contributions —(i) General rule. 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—

(A) Any matching contribution (as defined in §1.401(m)–1(a)(2)) made by reason of such an election;

(B) Any benefit, right or feature (such as a plan loan) that requires, or results in, an amount to be withheld from an employee's pay ( e.g. to pay for the benefit or to repay the loan), to the extent the cash or deferred arrangement restricts elective contributions to amounts available after such withholding from the employee's pay (after deduction of all applicable income and employment taxes);

© Any reduction in the employer's top-heavy contributions under section 416©(2) because of matching contributions that resulted from the elective contributions; or

(D) 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.

I had a client with a similar request a few year's back, and this is what someone on these very boards pointed out to me.

I lost track of paragraph this post is from, so here's a link:

http://ecfr.gpoaccess.gov/cgi/t/text/text-....77&idno=26

[jpod]

My response to the employer would be as follows (so as to convey truthful information while not becoming the object of much ridicule). The idea presents a technical problem under the "contingent benefit" rule in the 401k regulations, and therefore presents a theoretical risk of plan disqualification if the IRS were to find out about the raffle (and then I would go on to explain what the regulation says). However, while still technically a potential problem, a true contest whereby only a small percentage of the NHCEs are rewarded for contributing the greatest percentages, or increasing their percentages by the greatest amount, and those rewards are modest, is not likely to inspire the IRS to make a stink over it.

[GBurns]

I am not aware of any de minimis exemption/exception in the rules, so I wonder why it would be worth the risk to do the "raffle" as jpod suggests.

[Guest Sieve]

Re: jpod's statement that "it is not likely to inspire the IRS to make a stink about it" . . . Just be careful, as best you can, when giving any advice in writing (including electronic) regarding federal income taxes (e.g., a qualified plan), that you comply with the following portion of Circular 230 (if you are a "practitioner", i.e. an attorney, CPA, enrolled agent, enrolled actuary, or ERPA):

"

§ 10.37 Requirements for other written advice.

(a)

Requirements.

A practitioner must not give written advice

(including electronic communications) concerning one or more Federal tax issues

if the practitioner

bases the written advice on unreasonable factual or legal assumptions (including assumptions as to future events), unreasonably relies upon representations, statements, findings or agreements of the taxpayer or any other person, does not consider all relevant facts that the practitioner knows or should know, or, in evaluating a Federal tax issue,

takes into account the possibility that a tax return will not be audited, that an issue will not be raised on audit, or that an issue will be resolved through settlement if raised

." (Emphasis added.)