The Internal Revenue Service (IRS) and Treasury Department have issued proposed regulations (REG-101355-26) outlining the requirements for making employer contributions to Trump Accounts under Code section 128. The guidance provides the first comprehensive framework for employers interested in offering Trump Account contributions to benefit employees and clarifies several issues that practitioners have been debating since enactment of the One Big Beautiful Bill Act (OBBBA). The proposed regulations also modernize and clarify the nondiscrimination rules applicable to dependent care assistance programs (DCAPs) under Code section 129.
In order for employer contributions to be made to a Trump Account on a tax-advantaged basis, they must be made under a Trump Account Contribution Program (TACP). For employers evaluating whether to add a TACP to their total rewards strategy, the proposed regulations provide significant operational details regarding program design, eligibility, contribution program requirements, taxation, and nondiscrimination compliance. However, the unique structure of Trump Accounts presents several issues that employers will need to address before establishing a TACP. These include the one-account limit for each eligible child, new employer notice obligations, and the additional administrative work required to permit employees to make pre-tax contributions to Trump Accounts through a cafeteria plan.
The regulations are only proposed and are not yet final. Treasury and the IRS have requested public comments by September 25, 2026, and scheduled a public hearing for October 15, 2026. Employers, industry groups, recordkeepers, and payroll providers may wish to submit comments regarding administrative challenges, testing methodologies, and transition issues before the regulations are finalized.
Background
As discussed in our March 20, 2026 article, the OBBBA created Trump Accounts under new Code section 530A. The OBBBA also established section 128 which allows certain employer contributions to be made on a tax-advantaged basis to Trump Accounts that are established for eligible employees or their dependent children. Specifically, section 128 permits employers to contribute up to $2,500 (indexed for inflation after 2027) annually on a tax-advantaged basis, subject to certain payroll taxes (as discussed in section 3), various operational conditions and nondiscrimination requirements similar to those applicable to DCAPs. In general, contributions to a Trump Account are subject to an aggregate annual limit of $5,000, adjusted for inflation, and section 128 contributions count toward the $5,000 annual contribution limit. Employer TACP contributions are deductible.
The legislation left many operational questions unanswered, including how the nondiscrimination rules would apply in practice. The proposed regulations are intended to fill those gaps and establish an administrative framework for employer-sponsored TACPs.
Key Highlights
1. Formal Rules for TACPS
The proposed regulations establish comprehensive requirements for TACPs. The proposed regulations confirm that a TACP program generally must:
- Be maintained pursuant to a written plan.
- Provide notice of the plan to employees.
- Operate exclusively for employees.
- Provide contributions to eligible employees’ or their dependents’ Trump Accounts.
- Satisfy applicable nondiscrimination requirements.
For employers, this means a formal benefit program with documented eligibility and operational procedures will be required. However, employers may be able to leverage some of the processes used for other programs such as DCAPs or adoption assistance programs.
Contributions only during Growth Period
TACPs may make contributions only to the Trump Account of an eligible child who is in his or her growth period (i.e., the period that begins when the initial Trump Account is established and ends on December 31 of the calendar year in which the eligible child attains age 17), and is an employee or an employee’s dependent.
Trump Account verification
Under the proposed rules, employers may rely on certain employee certifications regarding the age and relationship of the eligible child to the employee, unless the employer has actual knowledge that the certification is incorrect. However, the employer must use a reasonably designed method to verify, through information provided by the trustee, payroll processor, or other service provider, that the contribution is made to a valid Trump Account, such as via the use of a unique identifying number for the account. Treasury and the IRS are exploring ways in which this information can be validated in a secure, electronic way.
Trustee communications
Employers can structure section 128 contributions as a stand-alone contribution and/or match all or a portion of the federal government’s contribution to the Trump Accounts of an eligible child who is born in the period that starts in 2025 and ends in 2028 (Pilot Match). Employers are required, at the time they make a contribution, to advise the trustee that the amount is a section 128 contribution. If an employer later determines that a section 128 contribution does not qualify, in whole or in part, the proposed regulations require that the employer notify the trustee of the amount that is not qualified and the impacted calendar year within a reasonable period of time. The proposed regulations establish a safe harbor of 21 calendar days after the determination made as a reasonable period of time.
Form W-2 reporting of TACP contributions
Employers will also have to provide employees with a written statement showing the amount section 128 contribution. As with a DCAP, this requirement may be satisfied by reporting on Form W-2, Wage and Tax Statement, in accordance with the instructions to the form.
Open items
Guidance will be required on what employee certifications will require, what communications with trustees should contain, and how employers are to verify account information. Standardized compliance methods that employers may use to establish and administer TACPs, such as model forms for certification and trustee communication and standardized account verification would increase take-up of the program, particularly by small employers.
2. Employer Contributions to Trump Accounts Not Limited to TACPs
Importantly, the proposed regulations make clear that employers are not limited to making section 128 contributions to Trump Accounts. Employers may make after-tax contributions to Trump Accounts outside a TACP. After-tax contributions may be made intentionally or may result when the total contributions to an employee exceed the annual limit for contributions under section 128, as discussed in section 5. Such contributions generally would not qualify for the section 128 exclusion and would be treated under the normal federal tax rules applicable to taxable compensation. This flexibility may be useful for employers that wish to provide larger contributions or that do not wish to operate a formal TACP.
All employer contributions to a Trump Account for an employee or an employee’s dependent child(ren), whether made under section 128 or on an after-tax basis, are deductible.
3. Payroll Tax Treatment
While section 128 contributions are excluded from gross income, the proposed regulations confirm that section 128 contributions are considered wages subject to Social Security and Medicare (FICA) taxes and Federal Unemployment Tax Act (FUTA) taxes. Although the proposed regulations do not provide an express exclusion from Federal Income Tax Withholding (FITW), because FITW is generally intended to be commensurate with an employee’s income tax liability, any section 128 contributions that are excludable from gross income will not be subject to FITW. This is similar to how current adoption benefits under section 137 adoption assistance programs are taxed.
Accordingly, payroll systems will need to be configured carefully to ensure proper withholding and reporting, though they may be able to leverage off of procedures currently in place for adoption benefits.
4. Who Is an Eligible Employee?
The regulations adopt common-law employer and employee concepts when determining who may participate in a TACP. Importantly, the proposed regulations provide that:
- Sole proprietors are not treated as employees for purposes of receiving tax-favored contributions.
- Partners are not eligible employees.
- Directors serving solely as directors are not eligible employees.
- Two-percent S corporation shareholders are not eligible employees.
The regulations would incorporate the controlled group aggregation rules, such that all persons treated as a single employer under sections 414 (b), (c), (m), or (o) are treated as a single employer for purposes of section 128.
5. The $2,500 (indexed for inflation after 2027) Limit Applies per Employee
The proposed regulations clarify that the annual exclusion applies per employee, not per child and not per employer. Under the proposed regulations:
- An employee with multiple children may allocate section 128 employer contributions among several Trump Accounts.
- The employee’s total tax-free exclusion is capped at $2,500 (indexed for inflation after 2027) annually across all covered children.
- If an employee works for multiple employers, the aggregate amount excludable from income remains limited to $2,500 (indexed for inflation after 2027).
The proposed regulations clarify that excess section 128 contributions resulting from an employee’s participation in multiple TACPs will not cause a TACP to fail, provided each program independently limits contributions to the annual section 128 cap ($2,500, indexed for inflation after 2027). However, the $2,500 limit applies on a per-employee basis across all employers and eligible children. Accordingly, any excess contributions are taxable to the employee and must be included in the employee’s gross income. For example, if two employers each contribute $2,500 under compliant TACPs, neither TACP fails and no corrective notice to the trustee is required, but the employee must include the excess amount in income on their individual income tax return. Because section 128 contributions are reported on Form W-2, such excess contributions should be readily identifiable by both employees and the IRS.
The proposed regulations also confirm that employers are not responsible for monitoring the overall annual Trump Account contribution limit under section 530A(c)(2) ($5,000, indexed for inflation). Treasury and the IRS have indicated in separate proposed guidance that, if the annual section 530A limit is exceeded, excess contributions generally will be attributed first to non-section 128 contributions, such as contributions from relatives, before being attributed to section 128 contributions. For this purpose, pilot program contributions, qualified general contributions, and qualified rollover contributions are not treated as other-source contributions.
6. Cafeteria Plan Contributions and Election Changes
Consistent with Notice 2025-68, the regulations provide employers with the option to allow employees to make pre-tax contributions to the Trump Account of the employee’s dependent through a cafeteria plan arrangement.
The proposed regulations also provide flexibility with respect to employee election to make pre-tax contributions to a Trump Account. Unlike many cafeteria plan benefit elections that are generally irrevocable during a plan year absent a specified change-in-status event, the proposed rules allow employees to prospectively change or revoke Trump Account contribution elections at any time during the year, but no less frequently than monthly, provided the election change is effective before the salary is paid. This flexibility may increase employee participation. However, it may complicate administration for employers seeking to incorporate Trump Accounts into broader financial wellness programs.
7. Employers Cannot Restrict Investment or Trustee Decisions
The regulations provide that because each eligible child may have only one Trump Account employers may not directly or indirectly limit or restrict the selection of the trustee, custodian, investment options, or other account-level decisions associated with a Trump Account. This provision is consistent with the policy objectives reflected in the Department of Labor’s (DOL) guidance in Technical Release 2026-02 regarding ERISA coverage. As discussed in our July 7, 2026 article discussing the DOL guidance, excessive employer involvement in account administration could create additional compliance concerns. Maintaining employee and account-holder control over account decisions helps preserve the intended structure of the arrangement. However, it will also complicate the administration as employers may be responsible for transmitting funds and having ongoing communications with multiple trustees.
8. Application of Nondiscrimination Rules
As expected, the proposed regulations generally align the section 128 nondiscrimination rules with the existing DCAP rules under section 129. However, Treasury made several modifications to reflect the unique features of section 128. For example, unlike section 129, section 128 is limited to common-law employees and does not include an ownership concentration test.
The proposed regulations also create a nondiscrimination testing safe harbor for Pilot Match contributions. Under the safe harbor, Pilot Match contributions are disregarded for purposes of the contributions-and-benefits test and the average benefits test, although they continue to count for eligibility classification testing. To qualify, Pilot Match contributions must be offered on the same terms to all non-excludable employees with dependents eligible for the section 6434 pilot program (e.g., generally employees with less than one year of service who are under age 21, or employees covered by a collective bargaining agreement covering the benefit).
Compliance testing is likely to be one of the more significant administrative challenges associated with TACPs. The proposed regulations provide welcome guidance by clarifying how section 128’s nondiscrimination requirements should be applied and by updating the DCAP regulations to provide greater certainty around testing methodologies.
9. Clarification of the 55 Percent Average Benefits Test
In general, the requirements of the average benefits rule are satisfied if the average benefits provided to employees who are not HCEs under all plans of the employer is at least 55 percent of the average benefits provided to the HCEs under all plans of the employer.
The proposed regulations clarify that only employees who actually receive more than $0 in DCAP or Section 128 benefits, as applicable, need to be counted. Treasury acknowledged that this test has historically created uncertainty and compliance challenges for employers. The proposal includes updated rules intended to make administration and testing more straightforward, giving employers a more workable roadmap for designing compliant TACPs and DCAPs. The proposed regulations prescribe specific computational steps and definitions, including which employees are taken into account for purposes of the computation, making the test considerably more operational for employers and third-party administrators.
10. Correcting Nondiscrimination Failures
Under the proposed regulations, nondiscrimination failures generally are corrected by treating excess benefits provided to affected HCEs as taxable compensation rather than reducing benefits already received. For example, failures of the average benefits test (and the DCAP owner concentration test) generally are corrected by including the excess benefit amount in the HCEs’ income no later than the Form W-2 reporting deadline.
This correction method is particularly helpful for newly implemented TACPs and DCAPs, where participation patterns may be difficult to predict and traditional corrective distributions could be disruptive. By allowing employers to impute income instead, the regulations provide a practical means of preserving plan compliance using a correction framework that is similar in concept to remedies available in other employee benefit contexts.
One unresolved issue is how corrections should be reported when nondiscrimination testing is completed late in the year. Because payroll systems often cannot reflect these adjustments on the original Form W-2, employers may need to rely on Form W-2c reporting. Treasury and the IRS, however, have not yet confirmed that this approach is permissible.
Practical Employer Considerations
Employers evaluating adoption should carefully consider:
- Whether to offer tax-favored section 128 contributions, taxable contributions, or both.
- Whether employees may make pre-tax contributions through a cafeteria plan.
- Procedures for election changes and revocations.
- How payroll, benefits, and tax functions will coordinate regarding implementation.
- How contributions to the trustee will be set up and processed and how required trustee communications will occur.
- How payroll and HR systems will track the $2,500 (indexed for inflation after 2027) annual exclusion.
- Payroll administration for FICA, FUTA, and federal income tax withholding purposes.
- How eligibility will be defined.
- How nondiscrimination testing will be administered.
- Correction procedures.
- Governance structures designed to avoid impermissible control over trustees, custodians, or investments.
- Coordination with existing dependent care and other welfare benefit programs.
- Coordination with the DOL’s ERISA guidance.
Takeaway
REG-101355-26 substantially advances the implementation of employer-sponsored TACPs, addressing key issues such as the $2,500 employee exclusion limit, nondiscrimination testing, cafeteria plan integration, payroll tax treatment, employer contribution flexibility, and correction of testing failures. Together with the DOL’s recent ERISA guidance, the proposed regulations give employers a clearer framework for evaluating TACPs. While further guidance is expected as the rules are finalized, employers interested in offering these benefits should begin assessing program design and administrative considerations now.
