Overview
Trump accounts, created by the One Big Beautiful Bill Act (OBBBA), are a type of tax-advantaged savings account for children under age 18. Section 128 allows employers to contribute to these accounts and exclude these employer contributions from the employee's taxable income up to $2,500 annually (indexed after 2027). Section 128 provides that a Trump account contribution program is a separate written plan of an employer for the exclusive benefit of employees to provide contributions to the Trump accounts of those employees or dependents of those employees, so long as it satisfies certain nondiscrimination, eligibility and notification requirements.
The regulations propose to do two things. First, they would establish the administrative rules for section 128 Trump account contribution programs. Second, they would provide long-awaited guidance on the nondiscrimination rules that apply to section 129 dependent care assistance programs. These rules have historically been a source of confusion. Because section 128 borrows its nondiscrimination rules from section 129, the Treasury addressed both in a single package. The following describes these proposed rules in more detail.
For additional background on Trump accounts and the statutory structure established by OBBBA, see our prior insights.
What is an employer Trump account contribution program?
The proposed regulations clarify that an employer would need to adopt a separate written plan that defines who is eligible, how contributions work, how employees designate an account, how the program handles required notices and reporting, what the plan year is, and how the employer will correct administrative errors. An arrangement that does not follow its own written terms would not be a qualifying program, which means the contributions would not be excludable from taxable wages.
How much can an employer contribute, and how is it taxed?
The employer contribution exclusion would be capped at $2,500 per employee per year, indexed for inflation after 2027. Two proposed clarifications are especially useful:
- The limit would apply per employee, not per child. An employee with three children still would have a single $2,500 aggregate exclusion, though the program could let the employee allocate that amount among the children's accounts.
- The limit would apply across all employers. If an employee works two jobs at the same time or successively during the year, and each employer contributes $2,500, the employee would need to include the excess in income; neither employer's program would be disqualified as a result.
The exclusion would be an income tax exclusion only. Section 128 contributions would remain wages or compensation for Federal Insurance Contributions Act (FICA), Railroad Retirement Tax Act (RRTA) and Federal Unemployment Tax Act (FUTA) purposes, even though they would not be subject to federal income tax withholding. Any employer contribution above the limit, or one that otherwise fails to qualify, would be taxable wages.
Can employees contribute through a cafeteria plan?
Yes, but with an important limitation. An employee would be allowed to make pre-tax salary reduction contributions through a section 125 cafeteria plan to a dependent's Trump account. An employee who happens to be eligible for a Trump account, which will be fairly rare since Trump account contributions cease on Jan. 1 of the year in which the beneficiary reaches age 18, would not be allowed to make pre-tax contributions to his or her own account, because the Treasury views that as impermissible deferred compensation under the cafeteria plan rules.
RSM US insight: For employers that want maximum flexibility, allowing pre-tax salary reduction contributions may be the most attractive feature of the proposed regulations, because it would let employees fund a child's account with pre-tax dollars at a lower direct cost to the employer. A cafeteria plan offering this benefit would need to let employees change or revoke elections at least monthly, on a prospective basis.
Who is eligible to participate?
The proposed regulations would define ‘employee’ using the common-law standard and specifically exclude self-employed individuals. Thus, partners in a partnership, sole proprietors, directors acting only as directors and more-than-2% S corporation shareholders cannot receive section 128 contributions (or make pre-tax elections out of compensation), even though their company can sponsor a program for their common-law employees.
RSM insight: This exclusion may come as a surprise to owners of closely held businesses, including partners, sole proprietors and more-than-2% S corporation shareholders, who expected to participate in a Trump account program alongside their employees. The Treasury’s reading of the statute intentionally excludes self-employed individuals from section 128, even though those same owners remain eligible for the parallel section 129 dependent care benefit.
How do the nondiscrimination rules work?
Because section 128 borrows its nondiscrimination rules from section 129, the application of the tests are nearly identical. A section 129 dependent care assistance program must satisfy four tests, and a section 128 Trump account program must satisfy three of the same four. In both cases, the purpose is the same: the benefit cannot discriminate in favor of highly compensated employees (HCEs), as defined under section 414(q).
The shared tests work as follows:
- Contributions and benefits. The plan could not provide more favorable terms to HCEs. A plan would pass if it offers benefits on the same terms to all eligible employees, even if employees ultimately receive different amounts because of their own elections or utilization. As an example, a company provides that any employee with eligible children can choose to contribute to the Trump accounts, up to $2,500 for the year, on a pre-tax basis. The terms are the same for all employees who have children with Trump accounts.
- Eligibility. This is a two-part inquiry.
o First, the employer's eligibility classification would need to be reasonable and based on objective business criteria, such as job category, geographic location or salaried versus hourly status. Similar rules apply to 401(k) plans; however, most companies do not limit eligibility to select categories of employees. Identifying employees by name would not be a reasonable classification.
o Second, the classification would need to be nondiscriminatory, which the company could satisfy either through a facts-and-circumstances test or a numerical safe harbor. The safe harbor would compare the share of eligible non-highly compensated employees (non-HCEs) to the share of eligible HCEs and generally would pass if that ratio is at least 90%, reduced as the workforce becomes more heavily weighted toward non-HCEs. This approach is drawn directly from the coverage rules that apply to qualified retirement plans.
- Average benefits. The average benefit provided to non-HCEs would need to be at least 55% of the average provided to HCEs. The proposed regulations would clarify a point that has long confused employers: only employees who actually receive a benefit greater than zero would be counted in this calculation. Testing would be performed as of the last day of the plan year, and the average benefits test could disregard employees earning less than $25,000.
- Failing the average benefits test, typically because too few non-HCEs chose to make a pre-tax contribution, would likely cause a portion of the contribution for some of the HCEs who have contributed to be taxable to those HCEs.
For both types of plans, certain employees would be set aside when applying the eligibility and average benefits tests, including employees under age 21 who have not completed one year of service and certain collectively bargained employees.
One test differs. The fourth section 129 test looks at owner concentration of benefits and would not apply to section 128 plans. Under that test, no more than 25% of dependent care benefits may go to more-than-5% owners and their families. The Treasury omitted it from application to section 128 because self-employed individuals and owner-employees could not participate in a Trump account program in the first place, making the test unnecessary.
What happens if a plan fails?
A failure would not disqualify the entire plan. In both regimes, the program would continue to qualify for non-HCEs; only the affected HCEs would lose the exclusion from taxable wages. In both cases, the employer often could correct an average benefits failure by including the excess benefit in the HCEs' income by the Form W-2 furnishing deadline. Section 128 would add one extra step: because a Trump account has a trustee that must track the beneficiary's basis, the employer also would need to send the trustee a corrective notice reclassifying the amount as a non-section 128 contribution. This is important because the amount would then be treated as tax basis under the Trump account rules and would not be taxed on a later distribution, assuming the parties keep track of the taxable income contributions. Section 129 has no trustee, so no such notice would be required. Section 129, for its part, also allows correction of an owner concentration failure, which has no section 128 counterpart.
RSM US insight: Employers that already sponsor a dependent care FSA should pay particular attention to these rules. The same eligibility, average benefits and correction mechanics now apply to those programs, so this guidance may change how they perform testing even if they never adopt a Trump account program.
Is there relief from nondiscrimination requirements for employers matching the government contribution?
Yes. Many employers have announced plans to match the government's $1,000 pilot contribution for children born between 2025 and 2028. The proposed regulations would provide a safe harbor that disregards these matching contributions for the contributions and benefits rule and the average benefits test, as long as the match is offered on the same terms to all non-excluded employees. The safe harbor does not extend to the eligibility test.
RSM insight: This safe harbor is one of the most employer-friendly features of the proposed regulations. By removing pilot-match contributions from the contributions and benefits rule and the average benefits test, the Treasury directly addresses the primary compliance concern raised by employers that have already announced plans to match the government’s contribution, making broad adoption of matching programs more likely.
What are the employer's ongoing responsibilities?
Beyond funding the accounts, employers would take on new administrative duties. When making a contribution, the employer would need to affirmatively tell the trustee that it is a section 128 contribution and report the contribution to the employee, generally on Form W-2. If a contribution previously identified as a section 128 contribution turns out not to qualify, the employer would need to notify the trustee within a reasonable period, proposed to be 21 days.
Employers generally could rely on employee certifications about a beneficiary's age and relationship but would need to independently verify that the destination is a valid Trump account.
An employer Trump account program also could not limit contributions to a single chosen trustee, because each child is only allowed to have one Trump account.
What should employers do now?
The proposed regulations would apply to plan years beginning on or after final regulations are published, but employers may rely on them now. Some employers may question whether they have enough information available to them in order to establish and operate a compliant Trump account contribution program this year. Given the proposed regulations may be relied upon now, it appears that they do.
A public hearing is scheduled for Oct. 15, 2026, and comments are due 45 days after publication in the Federal Register. Employers weighing a Trump account benefit have a window to help shape the final rules and to design a compliant program in the meantime.
RSM insight: Employers may focus first on the Trump account provisions, but the more consequential piece of this guidance for many organizations could be the Treasury’s expanded rules for section 129 nondiscrimination testing. Employers that already sponsor a dependent care assistance program should review their current testing methodology now, even if they have no plans to adopt a Trump account contribution program.
How RSM can help
Whether a Trump account contribution program makes sense will depend on the employer’s workforce, benefits strategy and interest in expanding its overall compensation and benefits program. Before adopting a program, employers should evaluate the design choices that would drive administration, testing and employee communications. RSM can help employers assess whether to establish a plan and how to structure it, including:
- whether to establish a plan and make employer contributions;
- how to structure eligibility and contribution terms;
- whether to permit pre-tax employee contributions through an existing cafeteria plan;
- how to coordinate nondiscrimination testing with an existing dependent care assistance program and
- evaluate whether matching the federal pilot contribution fits the organization’s goals.
