Trump Accounts - A New Employee Benefit?
As of July 4, Trump accounts are officially live—parents, grandparents and even employers are able to fund these kiddie-IRAs after a one-year transition period since the One Big Beautiful Bill (OBBB) was signed into law. By now, clients are becoming familiar with the concept of Trump accounts—yet advisors are just beginning to dig into the nitty-gritty of the rules that govern. Trump accounts can be particularly interesting—and complicated—in the employment benefits sphere. As the rules evolve, employers and advisors should pay close attention to potential opportunities to provide a valuable—and potentially income tax-deferred—employment benefit to help business clients attract and retain top talent as flexible and diverse benefit programs become more in-demand.
Trump Accounts: The Basics
Parents can establish Trump savings accounts for any minor child (1) who is under the age of 18 in the year the account is established, (2) who has a Social Security number and (3) for whom an election is made on their behalf. Treasury has developed online and app-based platforms to allow parents to open and monitor Trump accounts.
At the parent's election, the federal government will provide a $1,000 initial contribution for newborn-beneficiaries born after 2024 and before 2029. Individuals can contribute up to $5,000 annually on an after-tax basis (the $1,000 "seed" funding does not count toward the $5,000 limit).
Once the child turns 18, the account is treated like a typical IRA. After-tax contributions can be withdrawn tax-free and pre-tax contributions are taxed as ordinary income.
Understanding How Trump Account Contributions in the Workplace Work
Outside the workplace, Trump account contributions are made on an after-tax basis—so the taxpayer receives no current tax benefit. Trump accounts in the employment benefit context are different. In the employment context, contributions are subject to a lower $2,500 annual limit (the $2,500 employment-based contribution counts toward the $5,000 overall limit).
Congress has created IRC Section 128—a new tax section that provides tax-favored treatment, assuming the employer satisfies all relevant requirements, including not discriminating in favor of highly compensated employees. Employers can elect to allow employees to make after-tax contributions via payroll tax deductions. While there would be no immediate tax benefit, the convenience alone can be attractive.
Employers can also establish a Section 128 program. This can allow the contributions to be made on a pre-tax basis. When the employer establishes a Section 128 program, the contributions are technically treated as employer contributions so that the amounts aren't currently taxable.
The downside is that employers then become subject to nondiscrimination rules to ensure the benefit isn't primarily benefitting highly compensated employees (the Treasury has yet to provide detailed rules on how the nondiscrimination rules work in this context, but it's expected that they will function similarly to dependent care programs).
Based on current Treasury guidance, Section 128 contributions can be offered via a cafeteria plan—but only if the contributions are made on behalf of an employee's dependent, not the employee.
Importantly, the DOL has clarified that Trump accounts are generally not ERISA-governed plans even if they are offered in the employment context.
Employment Benefit Possibilities
Employers have many different options when deciding how they want any type of employment-based Trump account program to function. Some employers may prefer to merely facilitate after-tax employee contributions. Others may prefer to offer a more robust option that allows for pre-tax contributions.
Employers are able to develop programs that match employee contributions, similar to in the employment context. They could also elect to develop more wholistic family wellness programs or offer benefits when an employee has a new baby.
It's also possible that the employer could elect to make flat-rate contributions on behalf of employees' dependents. Going forward, employers should be advised to evaluate the rules and determine how much responsibility they're willing to take on with respect to the new Trump account option.
Conclusion
Trump accounts and IRC Section 128 programs are, quite literally, in their infancy. As is true with any new tax-preferred savings program, it's likely that agency guidance will be ongoing, as questions and issues arise along the way. Advisors and employers should pay close attention to ongoing guidance if it's released. Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.