On August 10, 2026, the IRS released proposed regulations providing long-awaited guidance on employer contributions to Trump Accounts under Internal Revenue Code Section 128 while also clarifying several nondiscrimination testing rules applicable to dependent care assistance programs (DCAPs) under Section 129. The proposed regulations generally reflect earlier IRS guidance while addressing a number of questions raised regarding the practical implementation of these programs.
While many employers are still evaluating whether Trump Accounts fit within their overall benefits strategy, the proposed regulations offer valuable insight into how these arrangements may be structured and administered, providing greater clarity on several key design and operational considerations.
What Is a Trump Account?
Created under the One Big Beautiful Bill Act (OBBBA), a Trump Account is a special type of individual retirement account (IRA) established for an eligible child. During the beneficiary’s “growth period” (generally until the end of the year in which the individual turns age 17), special contribution, investment, distribution, and reporting rules apply.
Beginning in 2026, employers may contribute to an employee’s Trump Account or the Trump Account of an employee’s dependent through a qualified Trump Account contribution program. Employer contributions of up to $2,500 per employee per year may be excluded from the employee’s gross income, subject to future inflation adjustments.
Key Employer Requirements
A Separate Written Plan Is Required
The proposed regulations clarify that a Trump Account contribution program must be maintained under a separate written plan. The plan must address eligibility, contribution rules, employee designation procedures, reporting requirements, correction procedures, and other operational provisions. Employers must also operate the program in accordance with the written plan’s terms. For employers considering implementation, this means that a simple payroll practice will not be sufficient. Formal plan documentation and administrative procedures will be necessary.
Employees Must Receive Notice of the Program
Similar to dependent care assistance programs, employers must provide eligible employees with reasonable notice regarding the availability and terms of the Trump Account contribution program. While the IRS does not prescribe a specific format or content requirement, employers should ensure communications clearly explain eligibility and participation procedures.
Annual Reporting Requirements Apply
Employers must provide employees with a written statement reflecting contributions made during the prior calendar year. The proposed regulations allow this requirement to be satisfied through Form W-2 reporting. Current W-2 instructions require Section 128 contributions to be reported in Box 12.
In addition to employee reporting obligations, the proposed regulations include certain communication requirements between employers and Trump Account trustees, including correction procedures if an employer later determines that a contribution was not eligible for favorable tax treatment.
Eligibility Rules and Employee Certifications
The proposed regulations clarify that eligibility to participate in a Trump Account contribution program is generally limited to common-law employees and does not extend to self-employed individuals, such as 1099 contractors, partners, sole proprietors, or S corporation shareholders. The regulations also define who may qualify as an account beneficiary by incorporating the Code Section 152 definition of dependent, including qualifying children and qualifying relatives.
The regulations also permit employers to rely on employee certifications that an account beneficiary satisfies the applicable eligibility requirements. This approach may reduce the administrative burden by providing employers with additional flexibility when determining whether contributions qualify for favorable tax treatment.
The $2,500 Limit Applies Per Employee
One area of uncertainty addressed by the IRS involves application of the annual contribution limit. The proposed regulations confirm that the $2,500 exclusion limit applies on a per-employee basis, not on a per-dependent basis. As a result, an employee with multiple children does not receive a separate $2,500 exclusion for each child. Instead, the employee’s aggregate annual exclusion remains capped at $2,500 and may be allocated among multiple dependent accounts if permitted under the employer’s Trump Account contribution program. The IRS also clarified that the limit applies across all employers. Therefore, an employee who participates in multiple Trump Account contribution programs during a year remains subject to a single annual exclusion limit.
The proposed regulations also provide helpful administrative relief for employers. An employee’s receipt of Trump Account contributions from an unrelated employer generally would not jeopardize the tax-favored status of the employer’s program or require the employer to issue a corrective notice. Instead, employees are responsible for addressing any excess excludable contributions when filing their individual tax returns. The proposed regulations further clarify that employers are not responsible for monitoring compliance with the overall annual Trump Account contribution limit.
Cafeteria Plan Contributions
The proposed regulations clarify how Trump Accounts may interact with Section 125 cafeteria plans. In certain circumstances, employees may be permitted to make pre-tax salary reduction contributions through a cafeteria plan to a dependent’s Trump Account. The regulations also provide flexibility for employees to make prospective election changes at least once per month, provided applicable requirements are satisfied.
Employers considering this feature should work with legal counsel and cafeteria plan administrators to evaluate operational requirements and ensure plan documents and administrative procedures are updated appropriately.
Employers Cannot Restrict Contributions to Particular Trustees, Complicating Plan Administration
Several rule commenters requested flexibility to limit contributions to accounts held by selected financial institutions. The IRS declined that approach. Under the proposed regulations, an arrangement would fail to qualify as a Trump Account contribution program if the employer restricts contributions to Trump Accounts maintained by particular trustees or financial institutions. Employers would need to accommodate valid Trump Accounts regardless of the account provider. This requirement could create additional administrative complexity for employers and payroll vendors, particularly as the market for Trump Account providers continues to develop.
Nondiscrimination Rules Will Apply
Trump Account contribution programs will generally be subject to nondiscrimination requirements similar to those applicable to dependent care assistance programs. The proposed rules would prohibit programs from providing more favorable contribution or benefit terms to highly compensated employees (HCEs) than to non-highly compensated employees.
The IRS also proposes applying controlled group and affiliated service group aggregation rules, meaning related employers generally will be tested together when determining compliance.
For employers that may wish to offer matching contributions or enhanced benefits, careful review of program design and testing requirements will be important before implementation.
Nondiscrimination Testing Relief
In addition to extending nondiscrimination requirements to Trump Account contribution programs, the proposed regulations provide several welcome clarifications and correction opportunities for employers. Specifically, the IRS proposes to clarify the longstanding DCAP average benefits test by confirming that the calculation is based only on employees who actually receive benefits during the plan year.
The proposed regulations would also continue to exclude certain employees from the eligibility and average benefits tests, including employees under age 21, employees who have not completed one year of service, and certain employees covered by a collective bargaining agreement.
For employers interested in participating in the Section 6434 federal pilot matching contribution arrangement, the IRS proposes a special nondiscrimination testing safe harbor that may simplify compliance with certain testing requirements. Under the proposed safe harbor, employer contributions may satisfy the nondiscrimination requirements if they are made available on the same terms and conditions to all non-excludable employees.
The proposal also includes favorable correction rules. Consistent with existing DCAP principles, a nondiscrimination testing failure generally would not affect the tax treatment of benefits received by non-HCEs. In addition, certain failures involving the average benefits test and the DCAP owner concentration test could be corrected by including benefits as taxable income for affected individuals (typically high compensated employees), provided the correction occurs no later than the deadline for Form W-2 reporting. This approach would provide employers with greater flexibility to address testing failures.
A Reminder on Payroll Tax Treatment
Although qualifying contributions may be excluded from federal income taxation under Section 128, the proposed regulations clarify that the exclusion generally does not extend to Federal Insurance Contributions Act (FICA), Railroad Retirement Tax Act (RRTA), or Federal Unemployment Tax Act (FUTA) wages. As a result, employer contributions may still be subject to applicable employment taxes even when excluded from employees’ taxable income for federal income tax purposes.
Effective Date
Although these regulations remain in the proposed stage, taxpayers may rely on them before final regulations are issued. The IRS has requested comments on the proposed regulations, with comments due 45 days after publication in the Federal Register. The IRS has also scheduled a public hearing on the proposal for October 15, 2026, at 10:00 a.m. ET.
Employer Takeaways
Employers considering a Trump Account contribution program may want to begin evaluating:
- Whether the benefit aligns with the organization’s overall compensation and benefits strategy.
- Administrative and payroll system capabilities needed to support contributions.
- Required written plan documentation and employee communications.
- Nondiscrimination testing implications.
- Employment tax and reporting obligations.
Employers considering implementation should work closely with their payroll providers, tax advisors, and legal counsel to evaluate administrative feasibility and compliance requirements before launching a program.
Connect with a Sequoia consultant to learn how Sequoia’s compliance services are integrated in our benefits services and tailored solutions. And if you’re already a Sequoia client, stay on top of your employer obligations with your Compliance Checklist that highlights important compliance dates, action items, and resources.
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