Is a Trump Account Contribution Program in the Cards for Your Company?

The Treasury Department and the IRS have published proposed regulations providing much-needed guidance on Trump account contribution programs under new Internal Revenue Code Section 128. This guidance provides clarity on the rules applying to these programs and should provide greater comfort to employers considering the benefit. This article discusses the key aspects of a Trump account contribution program that employers should know.

What Is a Trump Account?

A Trump account is a modified traditional IRA account that is established for a minor child and that has the following key characteristics:

• Contributions - Contributions may be made during the account’s “growth period,” which runs from the date the account is established through the end of the year the beneficiary reaches age 17. Additionally, the Treasury Department will pay $1,000 into the account of a U.S. citizen born in 2025 through 2028 under a pilot program. Contributions from all sources other than the pilot program contributions must not exceed $5,000 annually. After the growth period ends, the account converts to a traditional IRA subject to all the same rules and limits that apply to a traditional IRA.

• Investments - During the account’s growth period, funds must be invested in a mutual fund or exchange traded fund that tracks a broad U.S. equity index, has annual fees at or below 0.1%, and meets other restrictions described in recently issued proposed regulations. After the growth period, these restrictions no longer apply, and the account may be invested like any other traditional IRA.

• Distributions - Distributions are not permitted during the growth period for any reason other than the beneficiary’s death or rollover to another trustee. After the growth period, distributions are permitted under the rules generally applicable to traditional IRAs, including income tax on the distribution and a potential additional tax on early withdrawals.

What Is a Trump Account Contribution Program?

A Trump account contribution program is an employer benefit under which one or both of the following can be permitted:

• Employer Contributions - Employers may directly contribute a total of up to $2,500 annually (subject to indexing) to the Trump account of a minor employee or to the Trump account of one or more of an employee’s minor dependents. The contributions are not subject to federal income tax but are considered wages subject to payroll taxes (FICA and FUTA). The employee may allocate the contribution among his or her dependents (e.g., $1,250 to each of two dependents).

• Employee Pre-Tax Contributions - Employers may permit employees to make their own pre-tax contributions of up to $2,500 (less employer contributions) to their dependents’ Trump accounts under the program and through the employer’s Code Section 125 cafeteria plan. The cafeteria plan must describe the benefit specifically and must permit prospective election changes at least monthly. The employee contributions may only be made to a dependent’s Trump account and not to a minor employee’s own Trump account.

What Do Employers Need to Know About the Trump Account Contribution Program?

• A written plan document and notification are required. The program must be stated as a stand-alone written plan specifying eligible classes, contribution rules, account designation procedures, certification and notice procedures, the plan year, and correction procedures. The employer must operate in accordance with those terms and notify eligible employees.

• The limit applies per employee. The $2,500 contribution limit applies per employee, not per dependent, and not per employer. An employee with two jobs has one aggregate limit and must include any excess in income. Because the exclusion is per employee, an employee whose employer makes contributions, or who contributes through a cafeteria plan, to more than one dependent’s account still has a single aggregate $2,500 limit. Also, spouses employed by the same employer are treated as separate employees with distinct $2,500 limits.

• Owners are excluded. “Employee” means a common-law employee, which excludes partners, sole proprietors, and 2% S corporation shareholders. A self-employed individual may sponsor a program but may not participate. Controlled group and affiliated service group members are aggregated for this purpose. Code Section 125 also bars owners from participating in a cafeteria plan.

• Employees should understand the logistics of their contributions. An employer may rely on a written employee certification as to the beneficiary’s identity, date of birth, and eligibility, but may not rely on certification that the recipient account is a valid Trump account; that must be verified through the trustee, payroll processor, or another service provider. Each contribution must be affirmatively identified to the trustee as a Code Section 128 contribution, with a corrective notice required within 21 days if it later proves not to qualify. The program may not limit contributions to a particular trustee.

• Nondiscrimination rules apply. The program must not discriminate in favor of highly compensated employees with respect to (i) contributions and benefits, (ii) eligibility, or (iii) average benefits. These rules are generally identical to those that apply to dependent care assistance programs under Code Section 129. A safe harbor accommodates employers matching the federal pilot contribution. If nondiscrimination requirements are not satisfied, highly compensated employees generally lose the tax benefits under the program.

What Should Employers Do Now?

Employers considering implementing a Trump account contribution program should begin drafting the written plan, coordinate with payroll and recordkeeping vendors on trustee verification and reporting, and model the nondiscrimination tests against their workforce, particularly where contributions will be permitted under a cafeteria plan. Although the regulations are only proposed, employers generally may rely on them now for plan years beginning before final regulations are issued.

If you have questions about Trump account contribution programs, please contact a member of our Employee Benefits & Executive Compensation team.