We are not aware of any limitations on paying referral fees to employees for selling certain types of deposit accounts, but the drawing for bank customers would likely violate restrictions on bank participation in lotteries.
Incentive Programs for Employee Referrals of Deposit Customers
As stated above, we are not aware of any limitations on paying referral fees based on employee sales of deposit accounts. There are restrictions on certain types of compensation related to mortgage loans, such as Regulation Z’s loan originator compensation rules (see 12 CFR 1026.36(d)) and RESPA’s referral fee limitations (see 12 CFR 1024.14(b)), but those would not apply to deposit products. In addition, the Interagency Guidance on Sound Incentive Compensation Policies would not apply to this program — the guidance applies only to compensation paid to executive officers or other employees who could expose your institution to material amounts of risk, and you have told us that program will apply only to tellers, customer service representatives, and similar staff members. Of course, tellers and any other employees in your deposit-taking areas should not make any recommendations regarding nondeposit investment products. See Interagency Statement on Retail Sales of Nondeposit Investment Products.
For tax reporting purposes, we believe that the value of the gift certificates awarded to employees should be reported on their W-2 Forms. As stated in the W-2 instructions, that form should include “total wages, bonuses (including signing bonuses), prizes, and awards paid to employees during the year” and “total noncash payments, including certain fringe benefits.”
Drawing for Bank Customers Referred by Employees
While it is possible to pay incentives to bank customers who refer deposit customers to your institution, we do not recommend holding a prize drawing that is limited to those bank customers. Any drawing or raffle that is limited to bank customers, or to a certain group of bank customers, would likely violate both federal and Illinois restrictions on lotteries. The Federal Deposit Insurance Act defines “lottery” as an arrangement in which participants “advance money or credit to another in exchange for the possibility or expectation that one or more” will win a prize. 12 USC 1829a(c)(2). Also, the Illinois Criminal Code defines lotteries as “any scheme or procedure whereby one or more prizes are distributed by chance among persons who have paid or promised consideration for a chance to win such prizes . . . .” 720 ILCS 5/28-1(a)(9), (1)720 ILCS 5/28-2(b). Because the proposed drawing would require participants to be bank customers, you would be requiring the participants to pay or advance money to your institution. As a result, we believe the proposed drawing would be considered a lottery under both the federal and Illinois definitions.
On the other hand, it should be acceptable to pay incentives to customers that open certain types of deposit accounts without violating these laws, provided that the incentives are not distributed by chance. Likewise, this should be the case with respect to incentives paid to customers who refer other deposit account customers to your institution. The FDIC, which is your primary federal regulator, has confirmed that both types of deposit incentive programs — paying bonuses to customers who provide referrals and to new customers — are permissible under the FDI Act and FDIC regulations. Advisory Opinion, FDIC 94-37 (July 19, 1994).
The value of any such incentives would have to be reported on IRS 1099-INT forms. As the IRS explained in a ruling, all payments of interest over $10 in a calendar year must be reported on a 1099-INT form. IRS Rev. Proc. 2000-30 (December 31, 1999). The ruling states that non-cash premiums must be reported on 1099 forms as well, because such premiums fall under the IRS definition of “interest” (26 CFR 1.6049‑2). However, the ruling carves out an exemption for “de minimis” premiums, defined as non-cash inducements provided to a depositor to open or add to an account that have a value of $10 or less for a deposit of less than $5,000 or $20 or less for a deposit of $5,000 or more. Based on the value of the gift certificates, which is over $20, we believe that you would have to report their value on a 1099-INT form.