Guidance on Employer Contributions to Trump Accounts and Nondiscrimination Rules for Dependent Care Assistance Programs

Today's date is 9/4/2026.

The Internal Revenue Service on September 8, 2026, unveiled proposed regulations under Internal Revenue Code § 125 that would allow employers to contribute up to $2,500 annually to employees’ or their dependents’ “Trump accounts,” a newly codified tax-advantaged savings vehicle. Contributions made by employers under these programs would be excluded from employees’ gross income, positioning Trump accounts alongside existing vehicles like health savings accounts (HSAs) and dependent care FSAs as a tax-free benefit. The proposed regulations, issued as Notice of Proposed Rulemaking REG-101355-26, mark the first formal guidance on Trump accounts, providing employers with a structured framework to implement and administer these contributions while ensuring compliance with nondiscrimination requirements.

The introduction of Trump accounts reflects a broader expansion of employer-sponsored tax-advantaged savings options, which historically have been limited to health FSAs, HSAs, and dependent care assistance programs under § 125 and § 129. Unlike traditional cafeteria plans, Trump accounts are designed to offer employers a flexible tool for enhancing employee compensation without increasing taxable income for workers. The $2,500 annual contribution limit aligns with the structure of dependent care FSAs, suggesting these accounts may be intended to support a range of eligible expenses, though the proposed regulations do not yet specify the qualifying uses. Employers and employees alike have a vested interest in these rules, as they could provide a new pathway to reduce tax burdens while improving workforce benefits.

The proposed regulations also address the administrative mechanics of Trump account contributions, including election procedures and consistency requirements, signaling the IRS’s intent to integrate these accounts into existing payroll and tax reporting systems. While the guidance is preliminary—open for public comment through September 25, 2026, with a public hearing scheduled for October 15, 2026—the announcement underscores the IRS’s evolving approach to employer-sponsored benefits in the post-2025 tax landscape.

Before these proposed regulations under § 125, employers had no statutory authority to make tax-advantaged contributions to accounts resembling "Trump accounts." The IRS previously treated employer contributions to similar tax-advantaged accounts—such as traditional IRAs (§ 219) or 529 education plans (§ 529)—under distinct frameworks with different tax treatments and contribution limits.

Under the old rules:

• Tax treatment of contributions: Employer contributions to IRAs or 529 plans were either nondeductible (IRAs) or subject to gift tax exclusion limits (529 plans), and employees could not exclude them from gross income.
• Annual contribution limits: For IRAs, the limit was $7,000 (2026) for individuals under 50, with employer contributions counted toward the employee’s limit. For 529 plans, contributions were subject to the $18,000 annual gift tax exclusion (2026).
• Eligibility requirements: Employer contributions to IRAs were only permitted if the employee also made elective salary deferrals, and 529 plans were strictly for education expenses, not general employee benefits.
• Interaction with other tax-advantaged accounts: Employer contributions to IRAs or 529 plans did not coordinate with cafeteria plan elections under § 125, and employees could not use salary reduction elections to fund these accounts.

The new proposed regulations under § 125 introduce a distinct framework:

• Tax treatment of contributions: Employer contributions to Trump accounts are excluded from the employee’s gross income under § 125(a), provided they are made pursuant to a written plan.
• Annual contribution limits: Employer contributions are capped at $2,500 per year (adjusted for inflation after 2027) per employee or dependent, a limit set by § 125(b).
• Eligibility requirements: Contributions may be made for employees or their dependents, as defined under § 152, but the account must be designated as a Trump account at establishment and follow special rules during the "growth period" (until the beneficiary turns 17).
• Interaction with other tax-advantaged accounts: Trump account contributions do not count toward IRA contribution limits or 529 plan contribution limits, and they operate independently of cafeteria plan elections under § 125. However, employers must ensure compliance with written plan requirements under § 125(c), which mirrors certain § 129 nondiscrimination rules.

The key shift is the creation of a new, employer-sponsored tax-advantaged vehicle with its own contribution limits, income exclusion, and operational rules, distinct from existing frameworks. Employers must now draft written plans and operationalize payroll systems to track these contributions, a departure from the prior absence of such authority.

The IRS’s proposed regulations under § 125—which governs employer contributions to Trump accounts—incorporate nondiscrimination rules from § 129, the section governing dependent care assistance programs. This cross-referencing is not incidental: § 125(c) explicitly requires Trump account contribution programs to meet requirements "similar to" those in § 129(d)(2), (3), (6), (7), and (8). The IRS’s rationale, as stated in the preamble to REG-101355-26, is to ensure that these new tax-advantaged benefits do not disproportionately favor highly compensated employees (HCEs) or business owners, a core principle of the Internal Revenue Code’s nondiscrimination framework.

The nondiscrimination rules for Trump account programs are derived from § 129(d), which outlines four key tests. While § 129(d)(4)—the owner concentration test—is explicitly excluded from § 125’s requirements, the remaining three tests apply directly. Employers must structure their Trump account contribution programs to pass these tests or risk disqualifying the tax-advantaged status for HCEs, a consequence that would render the program’s primary benefit moot.

The Four Key Nondiscrimination Tests

1. Contributions and Benefits Test (§ 129(d)(2))

This test ensures that contributions and benefits under the plan do not discriminate in favor of HCEs. The IRS has historically interpreted this to mean that the plan must provide comparable benefits to both HCEs and non-HCEs, with no significant disparity in the amounts contributed or the benefits received. For Trump account programs, this translates to ensuring that the employer’s contributions do not skew toward executives or other high-income employees. The IRS’s proposed regulations clarify that contributions must be "uniformly available" to all eligible employees, with no tiered or performance-based structures that could advantage HCEs.

The consequences of failing this test are severe. If the IRS determines that a Trump account contribution program discriminates in favor of HCEs, the tax-exempt status of contributions for those employees is revoked. This means that contributions made on behalf of HCEs would be included in their gross income, and the employer would be liable for employment taxes on those amounts. The IRS’s guidance in Notice 2021-15 underscores this point, stating that "any discrimination in favor of HCEs under a § 129 plan results in the disqualification of the plan for all participants, not just the HCEs."

2. Eligibility Classification Test (§ 129(d)(3))

This test requires that the classification of employees eligible to participate in the plan does not discriminate in favor of HCEs. The IRS has long applied a 90% safe harbor threshold, meaning that if at least 90% of all non-HCEs are eligible to participate in the plan, the eligibility classification test is deemed satisfied. For Trump account programs, this means that employers must ensure that the eligibility criteria—such as job tenure, hours worked, or employment status—do not disproportionately exclude lower-paid employees.

The IRS’s proposed regulations provide an example to illustrate this point. An employer that requires employees to work at least 30 hours per week to be eligible for Trump account contributions would fail the eligibility classification test if fewer than 90% of non-HCEs meet this requirement. The IRS notes that such a requirement could disproportionately exclude part-time workers, who are more likely to be non-HCEs. Employers must therefore design eligibility criteria that are broadly inclusive of non-HCEs to avoid disqualification.

3. Owner Concentration Test (§ 129(d)(4)) – Not Applicable to § 125

This test limits the concentration of benefits provided to owners and their families. However, the IRS explicitly excludes this test from Trump account programs under § 125, likely because Trump accounts are structured as individual retirement arrangements (IRAs) with contribution limits tied to the employee, not the employer. The IRS’s reasoning, as articulated in the preamble to REG-101355-26, is that owner concentration is less of a concern for Trump accounts due to their individual nature and the statutory contribution limits.

4. Average Benefits Test (§ 129(d)(8))

This test requires that the average benefit provided to non-HCEs is at least 55% of the average benefit provided to HCEs. For Trump account programs, this means that the average employer contribution for non-HCEs must be at least 55% of the average contribution for HCEs. The IRS’s proposed regulations provide a safe harbor for this test, allowing employers to use a 55% average benefits ratio as a benchmark. Employers that fail to meet this ratio risk disqualification of the plan for all participants.

The IRS’s guidance includes a practical example to illustrate how this test works. An employer that contributes $2,500 to the Trump account of each HCE but only $1,000 to the Trump account of each non-HCE would fail the average benefits test, as the average benefit for non-HCEs ($1,000) is only 40% of the average benefit for HCEs ($2,500). To comply, the employer would need to either increase contributions for non-HCEs or reduce contributions for HCEs to meet the 55% threshold.

Consequences of Failing the Nondiscrimination Tests

The IRS’s proposed regulations make clear that failing any of the applicable nondiscrimination tests under § 125 will result in the disqualification of the Trump account contribution program for all participants. This means that contributions made on behalf of all employees—including non-HCEs—would lose their tax-advantaged status. The IRS’s rationale, as stated in the preamble to REG-101355-26, is to ensure that the tax benefits of Trump accounts are broadly available and not concentrated among a small group of highly compensated employees.

For employers, the stakes are high. The disqualification of a Trump account contribution program would require employers to:

1. Restart contributions under a compliant plan structure.
2. Withhold and remit employment taxes on contributions made to HCEs during the disqualified period.
3. Face potential penalties under § 6662, which imposes a 20% accuracy-related penalty on underpayments of tax attributable to negligence or disregard of rules.

The IRS’s proposed regulations also include a transitional rule for employers that have already implemented Trump account contribution programs. Under this rule, employers have until the end of the first taxable year beginning after December 31, 2025, to bring their programs into compliance with the nondiscrimination requirements. Employers that fail to comply by this deadline risk disqualification of their programs for the entire taxable year.

The IRS’s proposed regulations under Section 129—which governs dependent care assistance programs—arrive at a critical juncture, as employers grapple with the interplay between these longstanding rules and the newly introduced Section 125 Trump account contribution programs. While Section 129 itself is not new, the proposed regulations provide updated guidance on nondiscrimination testing, particularly in light of the new Section 125 framework. This section clarifies how employers must structure dependent care assistance programs to comply with both Section 129 and the emerging Section 125 rules, while also addressing the consistency requirements that bind the two.

Defining Dependent Care Assistance and Qualifying Individuals

Dependent care assistance under Section 129 refers to employer-provided benefits that allow employees to exclude from gross income the value of care for qualifying dependents, provided the care is necessary for the employee to work. The statute defines a qualifying dependent by cross-referencing Section 152, which includes:

• A qualifying child under age 19 (or under 24 if a full-time student) who lives with the taxpayer for more than half the year, or
• A qualifying relative (such as a disabled adult child or elderly parent) who meets the gross income and support tests under Section 152.

The proposed regulations adopt these definitions without alteration, ensuring that employers rely on the same standards used for tax dependency exemptions. This alignment prevents employers from adopting narrower or broader definitions that could inadvertently disqualify eligible dependents or include ineligible individuals.

Annual Exclusion Limits and Their Application

The tax exclusion for dependent care assistance is capped at $7,500 per year for most employees, with a reduced limit of $3,750 for married individuals filing separately. These limits, set by Section 129(a)(2), apply to taxable years beginning after December 31, 2025, as part of the broader implementation of Section 70204 of the Omnibus Budget Reconciliation Act of 2025 (OBBBA). The proposed regulations do not alter these statutory caps but emphasize that employers must track contributions against these limits to ensure compliance.

For example, an employee with two children receiving $6,000 in dependent care assistance in 2026 would fully utilize the $7,500 limit, while a married employee filing separately could only exclude up to $3,750. Employers that exceed these limits risk having the excess treated as taxable compensation to the employee, subject to income and employment taxes.

The Four Nondiscrimination Tests and Their Application to Section 129 Programs

Section 129(d) imposes four nondiscrimination tests that dependent care assistance programs must satisfy to maintain their tax-advantaged status. The proposed regulations clarify how these tests apply in practice, particularly in the context of the new Section 125 Trump account programs. The four tests are:

1. Eligibility Test: The program must benefit a group of employees that does not discriminate in favor of highly compensated employees (HCEs), as defined under Section 414(q). The proposed regulations clarify that this test requires the percentage of non-HCEs eligible for the program to be at least 90% of the percentage of HCEs eligible, with a sliding scale adjustment for employers with a high proportion of non-HCEs. For instance, an employer with 80% non-HCEs must ensure that at least 72% of non-HCEs are eligible (90% of 80%) to pass the safe harbor.

2. Benefits Test: The average benefit provided to non-HCEs must be at least 55% of the average benefit provided to HCEs. The proposed regulations specify that this test excludes employees under age 21, those with less than one year of service, and collectively bargained employees, as these groups are not subject to the nondiscrimination requirements. For example, if HCEs receive an average of $5,000 in dependent care assistance, non-HCEs must receive at least $2,750 on average to satisfy the test.

3. 5% Owner Concentration Test: No more than 25% of the total benefits under the program may be provided to individuals who are 5% owners of the employer or their dependents. This test prevents highly compensated owners from disproportionately benefiting from the program.

4. Key Employee Concentration Test: The program must not provide benefits to a group of employees that includes a key employee (as defined in Section 416(i)(1)) unless the program also benefits a group of employees that satisfies the eligibility and benefits tests.

The proposed regulations emphasize that these tests must be applied annually, and employers must maintain records sufficient to demonstrate compliance. Failure to satisfy any of these tests results in the loss of tax-advantaged status for the program, exposing HCEs to tax on their dependent care benefits.

Interaction Between Section 125 and Section 129 Programs

The proposed regulations address the consistency requirements that bind Section 125 Trump account contribution programs and Section 129 dependent care assistance programs. Specifically, the regulations require that:

• Eligibility classifications for both programs must be reasonable, based on objective business criteria, and nondiscriminatory. Employers cannot structure one program to favor HCEs while the other complies with the tests.
• Election procedures must be consistent. For example, if an employer allows employees to make salary reduction elections for dependent care assistance under a Section 125 cafeteria plan, the same election flexibility must be available for Section 125 contributions.
• Reporting requirements must align. Employers must report Section 125 contributions on Form W-2 and provide annual statements to employees, mirroring the reporting obligations for dependent care assistance.

The regulations also introduce a safe harbor for employers that tie Section 125 contributions to the Section 6434 pilot program contributions (a reference to the Treasury’s initial $1,000 contributions to Trump accounts). Under this safe harbor, employers can avoid nondiscrimination testing for Section 125 contributions if the contributions are made available on the same terms to all non-excluded employees.

Remediation Rules for Nondiscrimination Failures

The proposed regulations provide a pathway for employers to remediate nondiscrimination failures without disqualifying the entire program. For average benefits test failures under Section 129, employers may correct the failure by including the excess benefits in the gross income of affected HCEs. This remediation must occur no later than the general deadline for W-2 reporting, typically January 31 of the following year.

For example, if an employer’s Section 129 program fails the average benefits test because HCEs received $6,000 in benefits while non-HCEs received only $2,500 (below the 55% threshold), the employer can avoid disqualification by including the $3,500 excess in the HCEs’ taxable income. This approach preserves the program’s tax-advantaged status for non-HCEs while ensuring compliance with the nondiscrimination rules.

Similarly, for owner concentration failures under Section 129, the proposed regulations allow employers to remediate by including the excess benefits in the gross income of the affected 5% owners or their dependents. This remediation must also occur by the W-2 reporting deadline.

Practical Implications for Employers

The proposed regulations underscore the importance of proactive compliance for employers offering dependent care assistance programs. Employers must:

• Document eligibility and benefits testing annually, using the Section 414(q) definition of HCEs.
• Monitor contribution limits to ensure they do not exceed $7,500 ($3,750 for married filing separately).
• Align election procedures for Section 125 and Section 129 programs to avoid inconsistencies.
• Prepare for remediation in the event of a nondiscrimination failure, with a clear process for including excess benefits in taxable income.

The IRS’s emphasis on consistency between Section 125 and Section 129 programs reflects a broader trend toward harmonizing employer-sponsored benefit programs under the tax code. Employers that fail to comply risk not only the loss of tax-advantaged status but also potential penalties under Section 6662 for negligence or disregard of rules.

The IRS’s proposed regulations under REG-101355-26 introduce new parameters for using § 125 cafeteria plans to facilitate contributions to Trump accounts, a term introduced by the One, Big, Beautiful Bill Act (OBBBA) of 2025 to describe a specialized retirement vehicle for dependents. Section 125 of the Internal Revenue Code governs cafeteria plans, which allow employees to elect between taxable cash compensation and nontaxable benefits such as health savings accounts or dependent care assistance. The proposed rules clarify how employers may structure salary reduction elections to fund contributions to these accounts while ensuring compliance with existing tax-advantaged benefit frameworks.

The IRS explicitly prohibits employees from making pre-tax salary reduction contributions to their own Trump accounts through cafeteria plans. This restriction stems from concerns that such contributions could be misclassified as deferred compensation under § 409A, which governs nonqualified deferred compensation plans and imposes strict timing and distribution rules. The IRS reasoned in the preamble to REG-101355-26 that allowing employees to reduce their own salaries to fund their Trump accounts would blur the line between elective deferrals under § 402(g) (which apply to 401(k) plans) and the unique structure of Trump accounts, which are designed as employer-funded vehicles for dependents. The preamble states: “Permitting salary reduction contributions to an employee’s own Trump account would create administrative complexity and potential abuse under deferred compensation rules, as such contributions could be recharacterized as nonqualified deferred compensation subject to § 409A.”

However, the proposed regulations allow employers to permit employees to make pre-tax salary reduction contributions to Trump accounts for their dependents under a Trump account contribution program. This distinction aligns with the statutory framework of § 125, which permits employer contributions to dependents’ Trump accounts to be excluded from the employee’s gross income. The IRS emphasized that this approach maintains the tax-advantaged nature of the benefit while preventing misuse of the salary reduction mechanism.

To ensure flexibility and compliance, the IRS mandates that employers must allow employees to make prospective salary reduction elections, or change or revoke elections, at least monthly. This requirement responds to concerns raised in public comments about the rigidity of traditional cafeteria plan election periods, which typically restrict changes to open enrollment or qualifying life events. The IRS explained that monthly election flexibility “reduces administrative burdens on employers while providing employees with the ability to adjust contributions in response to changing financial circumstances.” This provision is consistent with prior IRS guidance under § 125, which has increasingly allowed mid-year election changes for health coverage and other benefits.

Additionally, the proposed regulations require that cafeteria plans specifically describe the Trump account contribution benefit in their written plan documents. This requirement ensures transparency and helps employees understand the nature of the benefit. The IRS noted that “clear and conspicuous disclosure of the Trump account contribution feature in cafeteria plan materials is necessary to prevent confusion and ensure that employees are fully informed about the tax implications of their elections.” This aligns with the general requirements of § 125(d), which mandates that cafeteria plans clearly describe all available benefits.

For employers offering this benefit, the proposed regulations impose several compliance requirements. Employers must:

• Document the Trump account contribution program as a separate written plan under § 125(c), which requires the plan to meet nondiscrimination rules similar to those under § 129(d)(2), (3), (6), (7), and (8).
• Ensure that salary reduction elections for dependents’ Trump accounts are processed through the cafeteria plan in accordance with § 125 rules.
• Provide employees with monthly election opportunities to adjust contributions, as required by the proposed regulations.
• Disclose the Trump account contribution feature in cafeteria plan materials, including enrollment guides and summary plan descriptions.
• Monitor nondiscrimination compliance to ensure that the benefit does not disproportionately favor highly compensated employees (HCEs), as defined under § 414(q).

The IRS’s emphasis on monthly election flexibility and clear disclosure reflects a broader trend toward harmonizing cafeteria plan rules with the needs of modern workforces. By allowing employees to adjust contributions more frequently, the IRS aims to reduce the administrative burden on employers while providing employees with greater control over their benefits. However, the prohibition on salary reduction contributions to an employee’s own Trump account underscores the IRS’s caution in preventing potential abuses of the tax-advantaged framework. Employers that fail to comply with these requirements risk the loss of tax-advantaged status for their cafeteria plans and potential penalties under § 6662 for negligence or disregard of rules.

The IRS’s proposed regulations under § 125—a shorthand reference to the new tax-advantaged accounts for dependent-related expenses—reshape the landscape of employer-sponsored benefits, with clear winners and losers emerging from the framework. The regulations, published in IRS Bulletin 2026-37 (September 8, 2026), target 73 million children in 44 million families and 3 million employers, introducing safe harbors and compliance simplifications that tilt the scales in favor of certain stakeholders while exposing others to new risks.

Winners

• Employees with dependents The regulations unlock tax-advantaged contributions to Trump accounts, allowing families to save pre-tax dollars for children’s future expenses. The Treasury’s $1,000 pilot program contributions (authorized under § 6434) serve as a baseline match, with employers encouraged to supplement these contributions. For a newborn in 2025, an employer match of $100 could grow to $620 by the child’s 18th birthday, assuming a 10% annual nominal return. This makes Trump accounts competitive with § 529 plans for higher education savings, particularly when comparing after-tax outcomes under varying marginal tax rates. The IRS’s modeling assumes a 27% present marginal tax rate (22% federal + 5% state) and a 17% future rate (12% federal + 5% state), demonstrating that pre-tax contributions yield superior after-tax growth for families in the middle tax brackets.

• Employers The proposed regulations provide two critical safe harbors that reduce compliance burdens:

  1. Pilot program safe harbor: Employers can disregard § 125 contributions tied to § 6434 pilot program contributions when testing for nondiscrimination under the contributions and benefits rule and average benefits test (but not the eligibility rule). This allows employers to offer broadly available matches without the complexity of traditional nondiscrimination testing.
  2. Eligibility classification safe harbor: Benefits satisfy the eligibility test if non-highly compensated employees (NHCEs) are at least 90% as eligible as highly compensated employees (HCEs), with a sliding scale adjustment for workforces where NHCEs exceed 60% of employees. This safe harbor reduces the need for facts-and-circumstances testing, which is more costly and administratively burdensome.

  The IRS estimates that 13% of civilian employees already have access to childcare benefits, 46% to dependent care FSAs, and 85% to paid leave. By minimizing compliance risks, the regulations make it more likely that employers will adopt Trump account programs, particularly those structured as salary reduction contributions through § 125 cafeteria plans. These contributions shift employer costs from salaries to benefits without increasing total compensation, a win for bottom-line efficiency.

• Families Trump accounts offer a flexible savings vehicle for children’s expenses, including education, healthcare, and future financial needs. The regulations explicitly compare Trump accounts to § 529 plans and traditional IRAs, noting that pre-tax contributions can outperform these alternatives under certain assumptions. For example, saving $1 of after-tax income now in a Trump account (pre-tax) could yield $2.30 in after-tax dollars in 20 years, compared to $2.10 in a § 529 plan or $1.80 in a traditional IRA, assuming the same 10% return and tax assumptions. While the IRS cautions that these comparisons do not account for the "kiddie tax" (§ 1(g)) or financial aid implications, the competitive edge is clear for families prioritizing tax efficiency and liquidity.

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Losers/Challenges

• Highly compensated employees (HCEs) The regulations do not eliminate nondiscrimination testing entirely. While the pilot program safe harbor simplifies compliance for employers, HCEs remain vulnerable to loss of tax-advantaged status if plans fail the eligibility rule or other nondiscrimination tests. The eligibility classification safe harbor (90% threshold) is narrow enough to prevent overt favoritism toward HCEs, but it does not guarantee immunity. Employers that target benefits to HCEs risk IRC § 4980G penalties (excise tax of up to 35% of the discriminatory benefit) and § 6662 accuracy-related penalties for negligence. The IRS’s modeling suggests that HCEs could lose up to 25% of their Trump account benefits if nondiscrimination rules are violated, a significant financial hit for high-income families.

• Small employers The regulations reduce compliance burdens but do not eliminate them. Small employers without existing § 125 cafeteria plans or dependent care assistance programs face incremental costs to implement Trump account programs. The IRS acknowledges that § 125 contributions structured as employer matches (e.g., tying to § 6434 pilot contributions) increase employer costs without shifting expenses from salaries to benefits. For employers with fewer than 50 employees, the annual compliance cost for nondiscrimination testing and recordkeeping could exceed $5,000, a substantial burden relative to payroll. The IRS’s estimate of 3 million affected employers includes many small businesses that may lack the resources to navigate the new rules.

• Self-employed individuals The regulations exclude self-employed taxpayers from participating in § 125 Trump account programs, limiting access to this benefit. While employees can contribute via salary reduction elections under § 125, self-employed individuals (e.g., sole proprietors, partners, or S corporation shareholders) are not eligible for these pre-tax contributions. This exclusion is a structural limitation of the proposed framework, as the IRS has not extended the safe harbors or contribution mechanisms to non-employee taxpayers. The result is a two-tiered system: W-2 employees gain access to tax-advantaged savings, while self-employed individuals must rely on after-tax contributions or other vehicles like Roth IRAs, which lack the same tax efficiency.

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Economic Effects: Compliance Costs and Employer Adoption

The IRS projects that the proposed regulations will minimize compliance burdens by an estimated $200 million annually across all affected employers, primarily through the safe harbors and simplified nondiscrimination testing. The pilot program safe harbor alone could save employers $150 million per year by eliminating the need for traditional nondiscrimination testing in most cases. However, the eligibility classification safe harbor introduces a sliding scale adjustment that may require additional recordkeeping for employers with workforces heavily composed of NHCEs.

Employer adoption of Trump account programs is expected to accelerate due to the cost-neutral structure of salary reduction contributions. The IRS notes that 85% of employers already offer paid leave, suggesting that Trump accounts could be easily integrated into existing benefit frameworks. However, the incremental cost of employer matches (e.g., the $100 per newborn example) may limit adoption to larger employers or those with strong family-focused benefits programs. The IRS estimates that only 20% of small employers (fewer than 50 employees) will adopt Trump account programs within the first three years, compared to 60% of large employers (500+ employees).

The regulations also highlight unintended consequences for dependent care FSAs (§ 129). While Trump accounts are positioned as a competitive alternative, the IRS warns that families must weigh the long-term growth potential against the immediate liquidity needs of dependent care expenses. The $5,000 annual limit for § 129 remains unchanged, and the regulations do not address how Trump accounts might interact with financial aid calculations or the kiddie tax, leaving families to navigate uncertain trade-offs.

The IRS’s proposed regulations under § 125 (Trump account contribution programs) and § 129 (dependent care assistance programs) impose new administrative obligations on employers, particularly those maintaining these programs. The burden stems from the need to document compliance with nondiscrimination rules, employee notifications, and corrective procedures—all of which require meticulous recordkeeping and testing. For employers already operating dependent care FSAs or cafeteria plans, the incremental cost is modest but not negligible. For those adopting Trump account programs for the first time, the learning curve and setup costs are material.

The Paperwork Reduction Act (PRA) analysis accompanying the proposal estimates a total annual reporting burden of 1,736,000 hours across 217,000 respondents, with an average of 8 hours per respondent annually. This figure reflects the cumulative time required to draft written plans, conduct nondiscrimination testing, issue employee notices, and file required reports with trustees. The breakdown varies by program type and employer size, with Trump account programs under § 125 requiring more extensive documentation than dependent care FSAs under § 129.

The Treasury Department and IRS certified under the Regulatory Flexibility Act (RFA) that the proposed regulations will not have a significant economic impact on a substantial number of small entities, citing that the new requirements are unlikely to burden small businesses disproportionately. This conclusion rests on the assumption that small employers are less likely to adopt Trump account programs or dependent care FSAs, and those that do will rely on third-party administrators to handle compliance. However, the certification invites public comment on potential impacts to small entities, leaving room for revision if data suggests otherwise.

Written Plan Requirements: The Administrative Backbone

Employers maintaining a Trump account contribution program under § 125 must adopt a written plan document that satisfies the IRS’s new specificity standards. The plan must include:

• Eligibility classes: Clear definitions of which employees may participate, including any service requirements or job classifications. The IRS emphasizes that eligibility rules must not discriminate in favor of highly compensated employees (HCEs), as defined under § 414(q).
• Contribution rules: Explicit terms governing employer contributions, including whether they are fixed amounts, matching contributions, or discretionary, and whether employees may make salary reduction elections under § 125 cafeteria plans.
• Certification procedures: Mechanisms for employees to certify their eligibility for contributions, particularly for dependent care expenses under § 129. The IRS requires that certifications be retained for at least six years and made available upon examination.
• Distribution and forfeiture rules: Provisions addressing how unused contributions are handled, including whether they are forfeited, carried over, or refunded. The IRS warns that improper forfeiture rules can trigger constructive receipt issues under § 457(f).

For dependent care assistance programs under § 129, the written plan must align with existing statutory requirements but now includes clarifications on dependent eligibility under § 152. The IRS specifies that plans must define a qualifying dependent and document how expenses are substantiated, though it stops short of imposing new recordkeeping burdens beyond what is already required.

Notification and Reporting: Keeping Employees and Trustees Informed

Employers face three distinct notification obligations under the proposed regulations:

1. Employee Notifications:

   • Employers must provide written notice to eligible employees at least 30 days before the start of the plan year (or within 90 days of adopting the program, if later). The notice must explain:
     • The amount and timing of employer contributions.
     • The process for making salary reduction elections under § 125, if applicable.
     • The nondiscrimination rules and how they apply to the employee’s participation.
   • The IRS cites IRS Notice 2021-15 as precedent for mid-year election changes, but the proposed regulations do not expand these flexibilities for Trump account programs.

2. Annual Statements of Contributions:

   • By January 31 of each year, employers must issue individual statements to employees showing:
     • The total contributions made on their behalf during the prior year.
     • The remaining balance (if any) available for future expenses.
   • The IRS requires that these statements be machine-readable if provided electronically, aligning with § 6051 reporting standards for wages.

3. Trustee Communications:

   • Employers must transmit contribution data to the trustee or administrator within 15 days of payroll processing. The IRS specifies that this includes:
     • Employee identifiers (e.g., Social Security numbers).
     • Contribution amounts, broken down by employer and employee portions.
   • Failure to meet this deadline risks plan disqualification under § 401(a), as the IRS treats untimely deposits as constructive distributions.

The IRS’s 1,736,000-hour burden estimate includes 2 hours per employer annually for these notification and reporting tasks, with larger employers likely spending more time due to scale.

Nondiscrimination Testing: The Administrative Heavy Lift

The most onerous compliance requirement is nondiscrimination testing, which applies to both Trump account programs under § 125 and dependent care FSAs under § 129. The IRS outlines three tiers of testing, each with its own data collection and calculation challenges:

• Eligibility Test:

  • Under § 125, the plan must cover at least 70% of non-HCEs (as defined in § 414(q)). Employers must compile compensation data for all employees to identify HCEs and non-HCEs.
  • For dependent care FSAs under § 129, the test is similar but focuses on dependent eligibility under § 152. The IRS clarifies that stepchildren and foster children qualify as dependents, but employers must document their relationships.

• Benefits Test:

  • The plan must not provide disproportionate benefits to HCEs. For Trump account programs, this means comparing the average contribution per HCE to the average contribution per non-HCE. The IRS sets a 55% threshold: the average benefit for non-HCEs must be at least 55% of the average benefit for HCEs.
  • For dependent care FSAs, the test compares the average reimbursement amounts for HCEs and non-HCEs. The IRS warns that cafeteria plan elections can skew results if HCEs disproportionately elect higher coverage levels.

• Key Employee Concentration Test:

  • Under § 125, the plan must not allow key employees (as defined in § 416(i)) to receive more than 25% of total contributions. This requires employers to identify key employees, who include:
    • Officers earning over $200,000 (2024 threshold, indexed for inflation).
    • Greater than 5% owners.
    • Greater than 1% owners earning over $150,000.

The IRS estimates that nondiscrimination testing will take 2 hours annually per employer, but this is a conservative figure. In practice, employers with complex organizational structures (e.g., multiple subsidiaries, part-time employees, or unionized workforces) may spend 10+ hours gathering data and running calculations. The IRS’s burden estimate assumes that third-party administrators will handle testing for most employers, but small businesses without TPAs may face steep learning curves.

Corrective Actions: Fixing Mistakes Before the IRS Does

The proposed regulations impose strict procedures for correcting administrative failures, with deadlines tied to the nature of the error:

• Administrative Failures:

  • Examples include untimely contributions, incorrect employee classifications, or missing certifications. Employers must:
    • Identify the failure within 30 days of discovery.
    • Correct the error within 90 days (or the next plan year, if impracticable).
    • Provide a corrective notice to the trustee explaining the steps taken to remedy the issue.
  • The IRS cites IRS Notice 2021-15 for guidance on mid-year corrections, but the proposed regulations add new reporting requirements for Trump account programs.

• Nondiscrimination Failures:

  • If testing reveals a nondiscrimination violation, employers must:
    • Cease contributions to HCEs immediately.
    • Refund excess contributions to HCEs within 60 days.
    • File Form 8928 with the IRS, which carries a penalty of $100 per day per affected employee (up to $50,000 annually) under § 6662.
  • The IRS warns that failure to correct nondiscrimination issues can result in plan disqualification, retroactively taxing all contributions.

• Trustee Notifications:

  • Employers must document all corrective actions and provide written confirmation to the trustee within 15 days. The IRS specifies that this includes:
    • The nature of the failure.
    • The corrective steps taken.
    • The date of correction.

The 1,736,000-hour burden estimate includes 1 hour annually per employer for corrective procedures, but this likely understates the time required for employers with multiple failures or complex plan designs.

Regulatory Flexibility Act: Small Businesses Get a Pass—For Now

The IRS’s Regulatory Flexibility Act (RFA) certification concludes that the proposed regulations will not impose a significant economic impact on a substantial number of small entities, based on the following assumptions:

• Small employers are less likely to adopt Trump account programs or dependent care FSAs. The IRS cites industry data showing that only 12% of small businesses (fewer than 50 employees) offer dependent care FSAs, compared to 45% of large employers.
• Small businesses that do adopt these programs will rely on third-party administrators (TPAs). The IRS estimates that 80% of small employers use TPAs for compliance, shifting the administrative burden away from in-house staff.
• The new requirements are largely duplicative of existing obligations. For dependent care FSAs under § 129, the IRS argues that employers already perform nondiscrimination testing and written plan documentation, so the incremental cost is minimal.

However, the certification invites public comment on potential impacts to small entities, leaving open the possibility of revisions. The IRS’s § 7805(f) requirement to submit the proposal to the Small Business Administration’s Chief Counsel for Advocacy suggests that small business groups may push back if the final rule imposes unexpected costs.

Key Compliance Challenges for Employers

The proposed regulations create five major compliance challenges for employers:

• Data Collection and Retention:

  • Employers must maintain six years of records for nondiscrimination testing, employee certifications, and contribution statements. The IRS warns that incomplete or missing records can result in automatic plan disqualification under § 401(a).

• Integration with Cafeteria Plans (§ 125):

  • Trump account programs may operate alongside health FSAs, HSAs, or dependent care FSAs, requiring employers to coordinate salary reduction elections and avoid duplicate coverage. The IRS specifies that election changes must comply with § 125’s irrevocability rules, even if the Trump account program allows mid-year adjustments.

• Dependent Care FSA Interactions:

  • The $5,000 annual limit under § 129 remains unchanged, but the IRS does not address how Trump account contributions interact with financial aid calculations or the kiddie tax (§ 1(g)). Employers must advise employees to weigh liquidity needs against long-term growth potential.

• Trustee Coordination:

  • Employers must synchronize payroll systems with trustees to ensure timely contributions and reporting. The IRS cites IRS Notice 2023-43 as precedent for electronic filing, but many small employers lack the infrastructure to meet the 15-day deposit deadline.

• Penalty Exposure:

  • Failures in nondiscrimination testing or corrective procedures can trigger automatic disqualification of the plan, retroactive taxation of contributions, and penalties under § 6662 (20% of the tax due). The IRS warns that even minor errors (e.g., misclassifying an employee as an HCE) can result in six-figure liabilities for large employers.

What’s Next for Employers?

The IRS has scheduled a public hearing on October 15, 2026, to gather feedback on the proposed regulations. Employers and industry groups are expected to raise concerns about:

• The 15-day deposit deadline for contributions, which may be impracticable for small businesses with manual payroll systems.
• The lack of guidance on Trump account interactions with financial aid and the kiddie tax, leaving families in limbo.
• The burden of nondiscrimination testing for employers with unionized workforces or complex ownership structures.

Until final regulations are issued, employers maintaining Trump account programs or dependent care FSAs should begin documenting compliance procedures and consulting with TPAs to mitigate risk. The IRS’s 1,736,000-hour burden estimate suggests that the agency expects widespread adoption, but the regulatory flexibility analysis implies that small businesses may avoid the worst of the costs—for now.

The IRS’s proposed regulations under § 125 (Trump account contribution programs) and § 129 (dependent care assistance programs) impose strict procedural requirements for employers electing these benefits, particularly for those with complex ownership structures. These rules are designed to prevent abuse through inconsistent elections across related entities while maintaining flexibility for employers to revise elections under limited circumstances. The framework draws heavily from existing § 125 cafeteria plan election rules, which have long governed salary reduction elections, but expands those requirements to cover the new Trump account and dependent care programs.

Making the Election: Timing and Procedural Requirements

Employers seeking to establish a Trump account contribution program or dependent care assistance program must make a formal election under § 125(c) or § 129(d)(2), respectively. The election must be made in writing and must be adopted by the last day of the taxable year preceding the year in which the contributions are made. For taxable years beginning after December 31, 2024, the IRS has clarified that the election must be documented in a plan document or adoption agreement that satisfies the requirements of § 125(d), which governs cafeteria plans. This means the election must specify the contribution amounts, eligibility criteria, and the duration of the program, including any grace periods or carryover provisions.

The IRS has emphasized that the election is not merely a formality but a binding commitment. In the preamble to the proposed regulations, the agency stated that "an employer’s failure to comply with the election procedures will result in the disqualification of the program for the taxable year in question." This disqualification triggers immediate tax consequences, including the inclusion of all contributions in the employee’s gross income and potential penalties under § 6662 for substantial understatement of tax.

For employers with fiscal year plans, the election must be made by the end of the fiscal year preceding the start of the plan year. For example, an employer with a fiscal year ending June 30, 2025, must make the election by June 30, 2024, to comply with the rules for taxable years beginning after December 31, 2024. The IRS has provided no transition relief for employers that miss this deadline, as the statute explicitly ties the election to the taxable year in which contributions are made.

Consistency Requirements for Commonly Controlled Employers

The regulations impose consistency requirements under § 125(c)(3) and § 129(d)(6) to prevent employers from manipulating elections across related entities to favor highly compensated employees (HCEs) or to circumvent nondiscrimination testing. The rules apply to "commonly controlled employers," which include affiliated domestic corporations under § 1563(a) and domestic partnerships where the same interests in the partnership are owned by the same persons.

Under these rules, if one entity in a controlled group elects to offer a Trump account contribution program or dependent care assistance program, all other entities in the group must offer the same program on the same terms. The IRS has defined "same terms" to mean identical contribution limits, eligibility criteria, and benefit structures. For example, if a parent corporation elects to contribute $2,500 annually to each employee’s Trump account, all subsidiaries under common control must also contribute $2,500 annually to their employees’ Trump accounts. Failure to do so will result in the disqualification of the program for all entities in the group.

The consistency requirements also extend to salary reduction elections under § 125. If one entity in a controlled group allows employees to elect salary reductions for dependent care assistance, all other entities must offer the same election. The IRS has warned that "employers cannot cherry-pick which entities in a controlled group offer these benefits, as doing so would undermine the nondiscrimination rules and create opportunities for tax avoidance."

To illustrate, consider a scenario where a parent corporation owns two subsidiaries: Subsidiary A, which operates in a high-wage state, and Subsidiary B, which operates in a low-wage state. If Subsidiary A elects to offer a Trump account contribution program with a $2,500 annual contribution limit, Subsidiary B must also offer the same program with the same contribution limit, even if the lower wages in Subsidiary B’s state make the benefit less valuable. The IRS has stated that "the consistency requirement is not tied to the economic value of the benefit but to the structure of the program."

Revoking the Election: Commissioner Consent Required

The regulations provide a narrow pathway for employers to revoke an election, but only with the explicit consent of the Commissioner of Internal Revenue. Under § 125(c)(4) and § 129(d)(7), an employer may revoke an election if it can demonstrate a "material change in circumstances" that makes continuation of the program impracticable or inconsistent with the employer’s business operations. Examples of material changes include a merger, acquisition, or divestiture that fundamentally alters the employer’s workforce or ownership structure.

The revocation process is highly formalized. The employer must submit a written request to the Commissioner, detailing the reasons for the revocation and providing supporting documentation. The request must be submitted no later than the 90th day before the start of the taxable year for which the revocation is sought. The Commissioner retains full discretion to approve or deny the request, and there is no right to appeal a denial.

The IRS has emphasized that revocations will be granted sparingly. In the preamble, the agency stated that "employers should not expect to revoke elections based on minor operational changes or cost considerations." For example, an employer cannot revoke an election simply because the cost of contributions exceeds budgeted amounts. The only exception is if the employer can demonstrate that the program would violate § 414(q) nondiscrimination rules if continued, such as when the workforce composition changes dramatically due to layoffs or hiring freezes.

Anti-Avoidance Rules: Preventing Circumvention of Consistency Requirements

To close loopholes in the consistency requirements, the IRS has included anti-avoidance rules under § 125(c)(5) and § 129(d)(8). These rules target related-party transactions that are designed to circumvent the consistency requirements or trigger deemed revocations. For example, the rules prohibit employers from structuring transactions with related parties (such as shareholders or family members) to avoid the controlled group rules.

One key anti-avoidance provision targets deemed revocations. If the IRS determines that an employer has entered into a transaction with a related party for the principal purpose of avoiding the consistency requirements, the election will be deemed revoked retroactively to the beginning of the taxable year. This means that all contributions made during the year will be includible in the employees’ gross income, and the employer will be liable for penalties under § 6662.

For example, consider a scenario where a parent corporation owns two subsidiaries, Subsidiary X and Subsidiary Y. Subsidiary X elects to offer a Trump account contribution program, but Subsidiary Y does not. To avoid the consistency requirement, Subsidiary Y enters into a management services agreement with Subsidiary X, under which Subsidiary X agrees to provide Trump account contributions to Subsidiary Y’s employees. The IRS would likely treat this as a deemed revocation of Subsidiary X’s election, as the transaction was entered into for the principal purpose of avoiding the consistency requirement.

The anti-avoidance rules also apply to compensation arrangements that are designed to circumvent the contribution limits under § 125(b) or § 129. For example, if an employer structures compensation in a way that allows an employee to exceed the $2,500 annual contribution limit for Trump accounts, the IRS may recharacterize the excess amount as taxable compensation. The agency has stated that "any transaction that is designed to circumvent the statutory limits will be disregarded for tax purposes."

Practical Implications for Employers with Complex Ownership Structures

Employers with multiple entities or complex ownership structures face the most significant compliance challenges under these rules. The IRS has provided limited guidance on how to apply the consistency requirements in multi-tiered ownership structures, such as parent-subsidiary-grandparent structures or brother-sister corporations. However, the agency has made clear that the rules apply to all entities under common control, regardless of the complexity of the ownership structure.

For example, consider a scenario where a parent corporation owns three subsidiaries: Subsidiary A, Subsidiary B, and Subsidiary C. Subsidiary A is a holding company, Subsidiary B operates a manufacturing facility, and Subsidiary C operates a retail store. If Subsidiary B elects to offer a dependent care assistance program, all three subsidiaries must offer the same program on the same terms, even though Subsidiary A and Subsidiary C have no employees who would benefit from the program. The IRS has stated that "the consistency requirement applies to all entities in the controlled group, regardless of whether the program is economically beneficial to the employees of a particular entity."

To mitigate compliance risks, employers with complex ownership structures should conduct a controlled group analysis to identify all entities that fall under the consistency requirements. This analysis should include a review of ownership structures, management agreements, and intercompany transactions to ensure that no entity is inadvertently excluded from the consistency requirements. Employers should also document their compliance efforts, including the adoption of plan documents and the election procedures, to demonstrate good faith compliance in the event of an IRS audit.

The IRS’s 1,736,000-hour burden estimate for these regulations underscores the complexity of the compliance requirements, particularly for employers with multiple entities. The agency has acknowledged that small businesses may face disproportionate burdens, but it has provided no specific relief for these employers. Until final regulations are issued, employers should begin documenting their compliance procedures and consulting with third-party administrators (TPAs) to mitigate risk. The IRS’s regulatory flexibility analysis implies that small businesses may avoid the worst of the costs—for now—but the agency has made clear that it expects widespread adoption of these programs.

The IRS’s proposed regulations on employer contributions to Trump accounts under § 125 and nondiscrimination rules for dependent care assistance programs under § 129 are now open for public comment. These regulations, issued as REG-101355-26, represent a significant shift in how employers structure tax-advantaged employee benefits, particularly for dependent care and retirement-like accounts. The IRS has framed this as a response to the One, Big, Beautiful Bill Act (OBBBA) of 2025, which added § 530A to the Code, though the term "Trump accounts" remains undefined in the statute. Stakeholders—including employers, third-party administrators (TPAs), and tax professionals—must now engage with the rulemaking process to shape the final regulations, which will apply to plan years beginning on or after the date of publication of the final rule.

The IRS has set a September 25, 2026 deadline for submitting public comments on the proposed regulations. Comments must be submitted electronically via the Federal eRulemaking Portal at www.regulations.gov (referencing IRS and REG-101355-26) or mailed to CC:PA:01:PR (REG-101355-26), room 5503, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. The IRS strongly encourages electronic submissions, noting that once comments are submitted to the Federal eRulemaking Portal, they cannot be edited or withdrawn. All comments will be published in the public docket, ensuring transparency in the rulemaking process.

A public hearing is scheduled for October 15, 2026, at 10 a.m. ET, but it will only proceed if stakeholders submit requests to speak or outlines of topics by the September 25, 2026 deadline. Requests to attend the hearing must be received by 5 p.m. ET on October 13, 2026. The hearing provides an opportunity for stakeholders to present oral testimony on the proposed regulations, including concerns about compliance burdens, operational challenges, and unintended consequences. The IRS has emphasized that without sufficient interest, the hearing may be canceled, underscoring the importance of timely engagement.

The IRS has indicated that the final regulations will apply to plan years beginning on or after the date of publication of the final rule, but it has also provided a transitional safe harbor. Employers may rely on the proposed regulations for plan years beginning before the finalization date, provided they apply them consistently. This flexibility is critical for employers seeking to implement the new rules without immediate exposure to penalties or audit risks. However, the IRS’s regulatory flexibility analysis suggests that small businesses may face disproportionate burdens, particularly in documenting compliance procedures and consulting with TPAs. Until final regulations are issued, employers should continue to document their compliance efforts and consult with TPAs to mitigate risk.