Proposed IRS Rules Set Terms for $2,500 Tax-Free Employer Contributions to Trump Accounts

The Treasury Department and IRS on August 11 proposed regulations governing employer contributions to Trump accounts, the children's investment accounts created by last year's tax law. The proposal published in the Federal Register explains how a company can contribute up to $2,500 a year per employee without the money counting as taxable wages, and how nondiscrimination rules apply. It also rewrites the long-unsettled testing rules for dependent care assistance programs.

What the proposal does

A Trump account is a type of traditional IRA opened for a child. Special contribution, investment and distribution rules apply during a growth period that ends on December 31 of the year the child turns 17. New Section 128 lets employees exclude from income contributions their employer makes to their own Trump account or a dependent's account under a qualifying program, for taxable years beginning after December 31, 2025.

• One cap per employee. The $2,500 limit, indexed for inflation after 2027, applies per employee, not per child. A parent with three children still has a single $2,500 exclusion.
• A written plan. The program must be set out in a separate written plan that specifies eligible classes of employees, contribution rules, how accounts are designated, notices and correction procedures, and the employer must follow its terms.
• Salary reduction limits. Earlier guidance, Notice 2025-68, allows contributions through a cafeteria plan salary reduction only when they go to a dependent's account, not the employee's own.
• Notices and statements. Eligible employees must receive reasonable notice of the program, and employers must identify contributions to the account trustee as Section 128 contributions.

The nondiscrimination rules

Section 128 borrows several tests from the dependent care rules in Section 129. Contributions must be offered on terms that do not favor highly compensated employees, though amounts can differ when employees make different elections. The eligibility classification must be reasonable, based on objective criteria such as job category, salaried or hourly status or location, and cannot simply list favored employees by name.

To show the classification is nondiscriminatory, an employer can use a facts-and-circumstances test or a numerical safe harbor modeled on qualified retirement plan rules. The safe harbor percentage starts at 90% and falls by three-quarters of a percentage point for each point by which the share of non-highly compensated employees in the workforce exceeds 60%. The statute also carries over the average benefits test from dependent care programs. If a program fails these tests, the proposed rules would disqualify it only for highly compensated employees, and rank-and-file workers would keep their exclusion. Notably, the statutory cross-reference does not include the dependent care rule limiting benefits for more-than-5% owners to 25% of the total.

The after-tax math

Example, illustrative round numbers and an assumed 35% combined income and payroll tax rate: a company with 40 employees, 30 of whom have children, adopts a program contributing $1,000 to one dependent's Trump account for every eligible employee. Paid as a cash bonus, $1,000 would leave an employee about $650 after tax. Paid as a Section 128 contribution, the full $1,000 lands in the child's account. The company deducts the contributions as it would wages, spending $30,000 across the eligible group.

For an owner-employee, the same program can fund an owner's own children, but only if the plan's design and coverage pass the tests described above. A plan covering only the executive team would likely fail the eligibility test and lose the exclusion for those highly compensated participants.

Moves to discuss with your advisor

• Whether a Trump account program would pass the eligibility safe harbor given the company's mix of highly compensated and other employees.
• How the program would interact with existing dependent care assistance programs, which are subject to the revised testing rules.
• Whether to offer employer-funded contributions, salary reduction for dependents' accounts, or both.
• How payroll and trustee reporting would identify contributions as excludable.

What to watch

Comments are due September 25, 2026, and a public hearing is scheduled for October 15 at 10 a.m. Eastern, which will be cancelled if no one asks to speak. Employers may wait for final rules before launching programs, though the statutory exclusion already applies for 2026.

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