Bank Account Bonus

A bank account bonus is consideration a depository institution offers for opening, keeping, renewing or adding to an account: most often a cash payment credited after a qualifying period, sometimes merchandise or a service. It is a regulated object rather than a marketing gesture, and the regulation that defines it is Truth in Savings, implemented as Regulation DD.

12 CFR 1030.2(f) is worth reading in full, because every practical consequence follows from it: "Bonus means a premium, gift, award, or other consideration worth more than $10 (whether in the form of cash, credit, merchandise, or any equivalent) given or offered to a consumer during a year in exchange for opening, maintaining, renewing, or increasing an account balance. The term does not include interest, other consideration worth $10 or less given during a year, the waiver or reduction of a fee, or the absorption of expenses."

Two exclusions in that sentence do useful work. Something worth $10 or less is not a bonus at all, so the branch coffee mug is outside the regime. And a waived fee is not a bonus either, which is why an offer to drop the monthly maintenance charge for a year carries none of the disclosure obligations that a $300 cash offer does, even where it is worth more.

The regulation's own name for this is the bare word "bonus". This page uses "bank account bonus" because that is the phrase a reader searches for and because the bare word would be ambiguous on any page that also discussed employment.

A bonus is not interest, by construction, and that is the point of defining it separately. 12 CFR 1030.2(n) defines interest as "any payment to a consumer or to an account for the use of funds in an account, calculated by application of a periodic rate to the balance", and then says the term "does not include the payment of a bonus or other consideration worth $10 or less given during a year, the waiver or reduction of a fee, or the absorption of expenses." The two definitions are mutually exclusive on purpose. Since the prescribed annual percentage yield formula is built from interest, a bonus cannot be inside the yield, and an institution cannot fold a one-time payment into an advertised rate to make it look better. The annual percentage yield page carries the formula and the comparison the yield is designed to support.

The practical reading is a small piece of arithmetic discipline. A quoted yield answers "what does this account pay on my balance?" A bonus answers "what does this bank pay me to show up?" Adding them together produces a number that is true of the first year and of no year afterwards, which is why a first-year-value comparison and a yield comparison should be done separately.

The tax answer runs the other way, and that collision is this page's most useful fact. Regulation DD says a bonus is not interest. The Internal Revenue Code and the IRS say a deposit account bonus is interest income. Both are correct within their own regime: one governs what a bank may print in an advertisement, the other governs what appears on a return. IRS Publication 550 states the rule for the non-cash version: "If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, the value may be reported to you as interest income on Form 1099-INT and you may have to report it on your tax return." A cash bonus is reported the same way. So the bank that told you the bonus was not interest will report it as interest, and the Form 1099-INT page covers that return and what its boxes contain.

One contrast inside that is worth a sentence, because the same figure appears on both sides of the collision doing different jobs. Regulation DD's $10 is a definitional floor: below it, the thing is not a bonus and the disclosure rules do not attach. The IRS's thresholds for a noncash gift are also measured in tens of dollars and are reporting thresholds rather than definitions, and they turn on the size of the deposit, which Regulation DD's does not. The credit card rewards page carries the IRS figures and the wider question of when a promotional payment is income at all.

What must be disclosed, and where. Two provisions do the work. 12 CFR 1030.4(b)(7) requires the account disclosures you receive at opening to state "The amount or type of any bonus, when the bonus will be provided, and any minimum balance and time requirements to obtain the bonus." And 12 CFR 1030.8(d) governs the advertisement: if a bonus is stated, the advertisement must clearly and conspicuously state the annual percentage yield using that term, the time requirement to obtain the bonus, the minimum balance required to obtain it, the minimum balance required to open the account if that is higher, and when the bonus will be provided. Section 1030.8(e) exempts broadcast and electronic media, outdoor media such as billboards, and telephone response machines from some of those items, which is why a radio spot can be shorter than a web page for the same offer.

That list is a ready-made checklist. Every one of the five items is a term the bank had to publish, so the questions worth asking about an offer are questions the paperwork must already answer: how much, how long must the money stay, how much must stay, and when does the money arrive.

The notice asymmetry, which is where an offer can quietly get worse. Because the bonus terms are terms required to be disclosed under 1030.4(b), a change to them that "may reduce the annual percentage yield or adversely affect the consumer" requires advance notice under 12 CFR 1030.5(a)(1), mailed or delivered at least 30 calendar days before it takes effect. But 12 CFR 1030.5(a)(2)(i) removes that requirement for "Changes in the interest rate and corresponding changes in the annual percentage yield in variable-rate accounts." So the bonus conditions come with a month's warning and the rate on the account does not. An offer built on a headline yield can therefore be worth materially less by the time the bonus is paid, with no notice at any point.

Credit unions are governed by a different rule with the same content. Regulation DD's coverage section, 12 CFR 1030.1(c), says plainly: "This part applies to depository institutions except for credit unions." The parallel is the NCUA's own Truth in Savings rule at 12 CFR part 707, which speaks of members and dividends rather than consumers and interest. Its bonus definition at 707.2(e) is otherwise the same $10 test, and it excludes two further things Regulation DD does not: non-dividend membership benefits and extraordinary dividends. So a credit union member reading a bank-focused article about bonus disclosure is reading the right mechanics under the wrong citation.

The bank publishes the offer with the five items its advertisement must carry, and repeats the bonus terms in the account disclosures at opening. You open the account and meet the conditions, typically a minimum deposit held for a stated period, sometimes a qualifying direct deposit. The bank credits the bonus on the date it disclosed. It reports the amount as interest income for the year, and you include it on your return.

A hypothetical example. The rates are illustrative, not current market rates, and the point of the arithmetic is the comparison rather than the specific figures.

A bank offers a $300 bonus for depositing $25,000 and keeping it for 90 days. The account itself pays 0.05%. An account the depositor could otherwise have used pays 4.00%.

Interest at 4.00% on $25,000 for 90 days is $25,000 × 0.04 × 90 ÷ 365 = $246.58.

Interest at 0.05% on the same balance for the same period is $25,000 × 0.0005 × 90 ÷ 365 = $3.08.

So taking the offer gives up $246.58 minus $3.08 = $243.50 of interest to collect a $300 bonus. The net gain is $300.00 minus $243.50 = $56.50 for tying up $25,000 for three months.

Tax does not change the ranking, and this is where the two regimes cancel out. The bonus is reported as interest income, and the interest forgone would have been interest income too, so both sides shrink by the same fraction at any marginal rate. A depositor comparing the two can do it before tax.

Three variables move that answer, and all three are disclosed terms. A larger bonus improves it directly. A shorter holding period improves it, because the forgone interest is proportional to time. And a smaller required balance improves it a great deal, because the forgone interest is proportional to the balance while the bonus is not. Run the same two steps on a $5,000 requirement instead: at 4.00% for 90 days that is $5,000 × 0.04 × 90 ÷ 365 = $49.32, at 0.05% it is $5,000 × 0.0005 × 90 ÷ 365 = $0.62, so the interest given up is $49.32 minus $0.62 = $48.70 and the net gain is $300.00 minus $48.70 = $251.30. Same bonus, one fifth of the required balance, and the net gain rises from $56.50 to $251.30. The offers worth taking are the ones with a small hurdle, and the hurdle is the first thing the advertisement had to tell you.

Pros

• It is real money, and unlike a rate it does not drift. The amount, the conditions and the payment date all have to be disclosed before you open the account.
• The advertisement's required contents amount to a comparison checklist, so two offers can be evaluated on published terms rather than on marketing copy.
• Because the bonus terms are disclosed terms, an adverse change to them carries a 30-day advance-notice requirement.
• The bonus sits outside the advertised annual percentage yield by regulation, which means the yield remains a clean comparison figure between institutions.

Cons

• It is taxable as interest income even though the banking rule says it is not interest, so the headline figure is a pre-tax number.
• The value depends almost entirely on the hurdle. A large required balance held in a low-rate account can give up most of the bonus in forgone interest, and the calculation is rarely presented that way.
• The account paying the bonus is often not the account worth keeping, so the honest comparison is the first year's total value against a good ongoing rate, and those are different questions.
• The rate on the account can be cut with no notice at all under the variable-rate exception, while the bonus conditions you have to meet cannot change without a month's warning.
• A waived fee is not a bonus under the regulation, so an offer framed as a fee waiver carries none of these disclosure protections however valuable it is.