I have seen many banks advertising bonuses of up to $100 to checking account customers with direct deposit or another type of ACH activity and wonder how this can be done since it is my understanding that bonuses are capped at $10 or $20 under Reg. Q. How are these banks getting around the limit or am I missing something?

Report the entire bonus amount on a 1099INT.

Skyline, Your reply does not address the question of the amount of the bonus.

This is a good question and I'd like to know the answer as well. I recently opened a DDA at a national bank and got $200 at opening (with direct deposit and account being open a minimum of six months). The way I read Reg. Q, that seems to be a violation (not that I'm complaining about the $200 - hehehe).

This is me thinking out loud (I do not know if this is correct)...

I would assume if it is reported on 1099 INT it is considered interest earned. Since you will pay taxes on it... it is not a violation.


Edit
I've never actually looked at Reg Q until today. It looks like if the bonus is not contingent on the opening balance nor the time the money stays on deposit, there are no restrictions on the $ amount of bonus.

217.101
(b) Notwithstanding paragraph (a) of this section, any premium that is not, directly or indirectly, related to or dependent on the balance in a demand deposit account and the duration of the account balance shall not be considered the payment of interest on a demand deposit account and shall not be subject to the limitations in paragraph (a) of this section

This is the critical piece. The bonus is contingent upon the direct deposit or some other service, not on the opening balance or some time requirement for the money to stay in the account. This is how banks "get around" the Reg Q prohibition. It has nothing to do with the IRS reporting requirements - they are two separate things with two different sets of rules.

Now I see how banks are getting around the limits but I fail to see the logic of why this exception was incorporated into the regulation. Can anyone help me understand it?

Also, do we report the bonus on a 1099 or is it a freebie to the customer?

The interest will be reported on 1099-INT, regardless of when it is paid or accrued. They have to report that.

If more than $10.00 is paid in a year, the total amount is required to be reported to IRS on 1099-INT.

I have a follow-up question on this. We will give a cash bonus when opening an installment savings account but if the account is closed before maturity the bonus will be deducted from the proceeds given to the customer. So, assuming that the bonus was given in 2009 and the account is open as of year end we will include the bonus in the 1099 for 2009. If the customer then closes the deposit some time in 2010 before maturity do we net the bonus against the interest earned and paid in 2010? What if the bonus is more than what was earned and paid in 2010? In another scenario, if the bonus is given in 2009 but then the account is closed before maturity in 2009 I assume that we would only report on the 1099 the interest paid and ignore the bonus (given and taken back) entirely?

Is all of this correct?

Exactly. It's quite possible if you do not have a minimum balance requirement and do not require the account to be opened for a specific time.

Read the "Bonus On Account" article at our website:
http://www.bankerscompliance.com/compliance-resources/free-downloads.htm

This is covered on the top of page 2.

Can I please bump my follow-up question of yesterday:

have a follow-up question on this. We will give a cash bonus when opening an installment savings account but if the account is closed before maturity the bonus will be deducted from the proceeds given to the customer. So, assuming that the bonus was given in 2009 and the account is open as of year end we will include the bonus in the 1099 for 2009. If the customer then closes the deposit some time in 2010 before maturity do we net the bonus against the interest earned and paid in 2010? What if the bonus is more than what was earned and paid in 2010? In another scenario, if the bonus is given in 2009 but then the account is closed before maturity in 2009 I assume that we would only report on the 1099 the interest paid and ignore the bonus (given and taken back) entirely?

Is all of this correct?