$100 for Opening an Account with Direct Deposit

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Question:

Our bank would like to pay $100 to every customer who opens a checking account and signs up for direct deposit. The incentive would be paid to the account upon confirmation of the service, which could be 30-60 days from account opening. In looking at the requirements of 217.101(b), I'm concerned that an examiner could argue that duration and minimum to open an account is a factor in the promotion. It goes without saying that an account would have to be established to hold the funds and I understand that direct deposit is an ancillary service. At the same time, the whole objective of the promotion is to get new customers and new accounts. Is this promotion risky from a compliance standpoint? Should we consider this non-employee compensation for IRS reporting purposes?

Answer:

I agree that an examiner could argue the point, but he or she would be on shaky ground. All you need to be able to do is to demonstrate that a customer who doesn't set up the required direct deposit, but opened the account anyhow, doesn't get the promotional payment. The idea behind the addition of section 217.101(b) to Reg Q was incentives to use other services, such as direct deposit, debit cards, bill pay, etc. In your example, the fact that the account has to stay open for a while to get the first direct deposit is immaterial. Some banks include this kind of incentive payment in a year-end 1099-INT. Because the payment is made not for the account or balance, but for the direct deposit sign-up, it should not be considered interest for IRS purposes. Instead, it's treated as an other-income, non-employee compensation item. If similar payments you make to the same customer aggregate to $600 in a calendar year, you have to include them on a 1099-MISC. From the taxpayer's perspective, it's taxable income anyhow.

First published on BankersOnline.com 5/05/08