The IRS has issued a proposed regulation addressing pre-tax employer and employee contributions to Trump accounts (i.e., Internal Revenue Code [IRC] section 128 contributions) through an employer’s Trump account program, including nondiscrimination requirements.
The proposed rule aligns with the prior guidance and answers many open questions regarding implementing a Trump account program, although some important details have not yet been provided. Employers may rely on the proposed rule until the final regulations go into effect.
Highlights
- Employer prohibited from selecting or limiting Trump account trustees: The proposed rule prohibits an employer from selecting or limiting the Trump account trustee that may accept section 128 contributions from the employer’s Trump account program
- Limited ability to rely on employee certifications: The proposal provides the following rules for confirming that section 128 contributions are only made to an eligible Trump account:
- Eligibility of account beneficiary: The employer may rely on an employee’s certification that the account beneficiary is in the beneficiary’s growth period (which is prior to the year the beneficiary turns 18) and that the beneficiary is the employee or the employee’s dependent, unless the employer has “actual knowledge that the certification is incorrect”
- Validity of Trump account: The employer would be required to verify that the account is a valid Trump account using a method “reasonably designed to verify, through information provided by the trustee, payroll processor, or other service provider, that the contribution is made to a valid Trump account.” The IRS is exploring alternative ways to validate this information electronically
- Employer communication with Trump account trustees: Employers must notify a Trump account trustee in writing, at the time contributions are transmitted, that the amounts are section 128 contributions. Employers also must have procedures to ensure that section 128 contributions are properly identified and to notify the trustee both when a contribution is a section 128 contribution and when an amount previously identified as such is later determined not to be
- Limited employer responsibility regarding annual Trump account limits: Section 128 contributions made by or on behalf of an employee are limited to $2,500 (subject to cost-of-living adjustments after 2027). In addition, section 128 contributions plus other contributions to an individual’s Trump account may not exceed an aggregate annual limit of $5,000 (subject to cost-of-living adjustments after 2027). An employer is responsible only for ensuring that section 128 contributions made through its own Trump account program do not exceed the limit and is not required to track or monitor whether total contributions from all sources, including after-tax contributions, exceed the aggregate annual limit. Similarly, if an employee has more than one dependent with a Trump account, the employer’s program may allow the employee to allocate contributions among multiple Trump accounts; however, the total section 128 contributions made on behalf of the employee to all of the employee’s dependents may not exceed the section 128 contribution limit. If an employer makes excess section 128 contributions on behalf of an employee, that amount must be treated as taxable wages and included in the employee's gross income
- Controlled and affiliated service group rules apply: The proposed rule treats related employers under the controlled group and affiliated service group rules as a single employer. As a result, section 128 contributions made by all related employers would be taken into account when applying the contribution limits and for nondiscrimination testing (discussed below)
- Employee pre-tax contribution elections: If an employer's Trump account program permits employees to make pre-tax salary deferrals to their dependents’ Trump account(s), employees must be allowed to make or modify their salary deferral elections at least monthly with respect to amounts that have not yet been made available to them
- FICA and income tax withholding: Although section 128 contributions are excluded from income tax and are not subject to income tax withholding, they are generally subject to FICA taxes (unless another exclusion applies)
- Written plan requirement: The following items are required to be specified in the written plan document:
- Classes of employees eligible to make or receive Trump account contributions
- Rules governing employer contributions, including amounts and whether pre-tax contributions are permitted via salary reduction through an IRC section 125 cafeteria plan
- Procedure for an employee to designate the trustee(s) of the Trump account who will receive the contributions
- Certification, notice and reporting requirements (discussed below)
- Correction procedures for certain administrative failures
- Notice to eligible employees: Eligible employees must be provided with a “reasonable notice” explaining the availability and terms of the Trump account program. The proposed rule does not include specifics regarding content or furnishing of the notice, but the intent is to provide reasonable notice sufficient to alert eligible employees regarding the ability to make and receive pre-tax Trump account contributions
- Written statement of contributions: An employer must provide an annual statement to an employee of the contributions made on their behalf during the prior year, which may be reported on the employee’s Form W-2
- Definition of employee: Owner employees, such as partners in a partnership or a 2% owner in an S corporation, may establish a Trump account program for their employees but may not make section 128 contributions for themselves or their dependents
- Clarification regarding the definition of a dependent: A child may be treated as a dependent of only one parent in the case of divorced or separated parents, or married parents who file separate tax returns
Nondiscrimination testing requirements
Under the One Big Beautiful Bill Act (OBBBA), nondiscrimination testing requirements for a Trump account program are similar to those for an IRC section 129 dependent care assistance program (DCAP).
The proposed rule addresses the nondiscrimination testing requirements for Trump account programs and provides important clarifications regarding DCAP nondiscrimination testing. The proposed rule provides clarity on certain definitions, how particular nondiscrimination tests work and what steps can be taken to correct contributions that cause testing failures.
While the nondiscrimination testing requirements for Trump account programs and DCAPs are identical in many respects — including regarding the eligibility test, the contributions and benefits test, and the average benefits test — certain necessary differences exist given the differences between the plans. Note: This article does not address the proposed DCAP nondiscrimination rules.
- No discrimination in contributions and benefits: A Trump account program will not satisfy the nondiscrimination rule for contributions and benefits if the program provides more favorable terms for HCEs than for non-HCEs (NHCEs). A program must provide contributions and benefits on the same terms for all employees who are eligible to participate, even if those employees receive different amounts of contributions and benefits as a result of differing elections or differing utilization of the contributions and benefits
- Nondiscriminatory classifications: The classifications for eligible employees cannot be discriminatory in favor of HCEs or their dependents. The employer’s eligibility classification must be reasonable and established under objective business criteria that identify the category of employees who are eligible under the program. A classification would be nondiscriminatory for a plan year only if the group of employees eligible under the program satisfies either a facts-and-circumstances test or a numerical safe harbor
- Average benefits test: To pass the average benefits test, the test most frequently failed by DCAPs, the average benefits provided to NHCEs under all Trump account programs of the employer must be at least 55% of the average benefits provided to HCEs. Generally, the average contributions and benefits provided to a group of HCEs or NHCEs under all Trump account programs for a plan year would equal the total dollar amount of such contributions and benefits provided during the plan year to employees in that group, divided by the number of employees in that group to whom such contributions and benefits in a dollar amount greater than zero are provided during the plan year
- Disregarded and excluded employees: Certain employees can be disregarded or excluded from nondiscrimination testing. Depending on the specific test, these may include employees whose compensation is less than $25,000, employees who have not attained age 21 and completed one year of service, or employees covered by a collective bargaining agreement (if there is evidence that the relevant benefits were the subject of good faith bargaining)
- Testing timing: Compliance with the average benefits test is determined as of the last day of the plan year, taking into account any individual employed on any day of the plan year who is not an excluded employee and who was provided benefits under a Trump account program on any day during the plan year
- Nondiscrimination testing failures and NHCEs: NHCEs are not affected by a Trump account program that fails to satisfy one or more of the applicable nondiscrimination requirements
- Correcting nondiscrimination testing failures: The proposed rule provides a remedial rule for failures of the average benefits test. A Trump account program that fails the average benefits test as of the last day of the plan year may still be treated as satisfying that requirement if, on or before the deadline for furnishing Form W-2 for the year in which the benefits were provided (January 31), the employer includes in the gross income of affected HCEs the amount of excess benefits determined under the proposed rule. Trustees must be provided a corrective notice within 21 calendar days after a determination is made advising them that a contribution is not a section 128 contribution
- Safe harbor for contribution pilot program: The proposed rule provides a safe harbor that would allow the matching contributions made by an employer to Trump accounts of employee dependents pursuant to the contribution pilot program (available to account beneficiaries born in calendar years 2025 through 2028) to be disregarded for purposes of compliance with certain nondiscrimination tests. The safe harbor applies only to the matching contributions an employer makes under the pilot program; other section 128 contributions must still separately satisfy the applicable nondiscrimination tests
Going forward
WTW is continuing to analyze the proposal to provide additional details and insights for employers. Employers should consult with advisors as to how this proposed guidance may affect their planning and implementation of Trump accounts.
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