Employer Contributions to Trump Accounts: What the Proposed Section 128 Rules Require

A client with thirty employees asked me in August what it would cost to fund her staff's kids' accounts. A Trump account is a traditional IRA opened for a child, and an employer can put up to $2,500 a year into one free of income tax for the employee. The answer starts with a correction. Employer contributions to Trump Accounts run through IRC Section 128, not Section 530A, and a lot of the secondary write-ups cite the wrong one. Section 530A creates the account. Section 128 creates the exclusion.

On August 11, 2026, Treasury and the IRS published proposed regulations under both, REG-101355-26, with a minor correction two weeks later. They are proposed, not final.

What Are Employer Contributions to Trump Accounts Worth to an Employee?

An employee can exclude up to $2,500 per calendar year from gross income for employer contributions made under a Trump account contribution program. The figure is $2,500 for 2026 and 2027, indexed after that under Section 128(b)(2). Notice 2025-68 got there first, setting the per-employee figure at Q&A I-1 and the employer's trustee identification duty at Q&A I-2. Section 70204 of Public Law 119-21, the One Big Beautiful Bill Act, added both Section 530A and Section 128, effective for taxable years beginning after December 31, 2025.

The Section 128 exclusion is an income tax exclusion only. There is no corresponding exclusion from wages under Section 3121 (FICA), Section 3306 (FUTA), or Section 3231 (RRTA), so a contribution that is fully excluded from the employee's income is still subject to those taxes. Federal income tax withholding is the exception: excludable contributions are not withheld against.

For the employer, the cost of a $2,500 contribution is $2,500 plus the employer share of FICA and FUTA on it, which is exactly what a $2,500 raise costs. The employer saves nothing. The saving is the employee's, and it is income tax only, because the employee still pays FICA on the contribution just as on a raise.

Under Section 530A(d)(2)(C), amounts excluded under Section 128 are not treated as investment in the contract. The money comes out taxable later.

What Does the $2,500 Limit Actually Cover?

Per employee, not per dependent. An employee with three children still has one aggregate $2,500 exclusion. Proposed 1.128-2(d)(5)(iv) would let a program split the contribution between the employee's own Trump account and one or more dependents' accounts, but the total for that employee cannot exceed the annual limit. An employer match of the Section 6434 pilot contribution counts against this same $2,500, not on top of it.

The limit also runs across employers, and the two levels are measured differently: (d)(5)(i) caps the program for a calendar year, while (d)(5)(ii) caps the individual for the employee's taxable year, counting Section 128 contributions from every employer. For a fiscal-year individual those are not the same twelve months. A client who changes jobs midyear, or holds two jobs with unrelated employers, can blow through the cap without either employer doing anything wrong. The proposed regulations handle this: excess across employers does not disqualify either program, provided each written plan prohibits contributions above the annual limit. Example 4 at proposed 1.128-2(d)(5)(vi)(D) runs two unrelated employers each contributing $2,500. Neither owes a corrective notice, but the individual has to include the extra $2,500 in gross income on that year's return.

Spouses are not aggregated, which is the answer clients hope for. Each spouse is a separate employee with a separate $2,500 limit, even when both contributions land in the same dependent's account and even when both spouses work for the same employer. Proposed 1.128-2(d)(5)(vi)(B) and (C) run exactly those two fact patterns.

An impermissible contribution lands badly from a payroll perspective. Under proposed 1.128-2(d)(3), a contribution that is not permitted is not made pursuant to a Trump account contribution program, so it is not excludable. Section 219(f)(5) then treats it as compensation, includible in gross income and wages in the year contributed, with employment tax reporting and withholding to match. A well-meaning employer who rounds up at year end reports the impermissible portion on the W-2 as wages, not on a correction, and a W-2c arises only if the error surfaces after the W-2 has already gone out. Example 5 at proposed 1.128-2(d)(5)(vi)(E) illustrates the same rule with a $1,000 contribution made outside the program.

Keep the Section 128 cap separate from the account's own limit. Section 530A(c)(2) caps aggregate contributions to a Trump account at $5,000 per calendar year before the beneficiary turns 18, excluding rollovers, qualified general contributions, and Section 6434 pilot contributions. Proposed 1.128-2(d)(5)(v) would say the employer has no obligation to police the $5,000 account limit. Proposed 1.128-2(d)(1) limits who can receive one: a beneficiary in the growth period, which ends December 31 of the year the beneficiary turns 17.

Do the Nondiscrimination Rules Apply, and What Does a Failure Cost?

Yes, three of them, and a failure costs less than most practitioners assume.

A highly compensated employee, or HCE, is defined by cross-reference to Section 414(q). Section 128(c) imports requirements similar to Section 129(d)(2), (3), (6), (7), and (8), and proposed 1.128-3 builds out three tests: contributions and benefits cannot be more favorable for HCEs, the eligibility classification has to be reasonable and nondiscriminatory in operation, and average benefits for non-HCEs have to be at least 55 percent of average benefits for HCEs.

There is no owner concentration test under Section 128. Section 129(d)(4) is the one paragraph of the dependent care nondiscrimination rules that Section 128(c) leaves out, and the proposed regulations do not add one back.

A nondiscrimination failure causes the arrangement to fail to be a Trump account contribution program only with respect to HCEs. Rank and file employees keep their exclusion. That is a different risk from the all-or-nothing failure when the program misses a structural requirement, like the written plan or the trustee rules.

Related entities get aggregated: all persons treated as a single employer under Section 414(b), (c), (m), or (o) are one employer for this purpose, imported through Section 414(t). A client with an operating company and a management company tests as one. If the employer plans to match the government's $1,000 Section 6434 pilot contribution for children born in 2025 through 2028, proposed 1.128-3(d) offers a safe harbor that disregards the match for the contributions-and-benefits and average benefits tests, but not for the eligibility test. The safe harbor applies only if the match is available on the same terms to all employees who are not excluded employees.

What Does the Employer Have to Identify, Verify, and Report?

More than a payroll deduction code. Proposed 1.128-2(b)(2) would require a separate written plan naming the eligible classes, the contribution and designation rules, the certification, notice, reporting, and correction procedures, and the plan year. Eligible employees have to get reasonable notification of the program's availability and terms.

Proposed 1.128-2(g) would require a written statement of the prior calendar year's contributions, satisfied by reporting the amount on Form W-2 in box 12 with code TA, per the 2026 General Instructions for Forms W-2 and W-3. If you worked through the OBBBA overtime deduction reporting changes last season, this is the same kind of earnings-code work.

Under proposed 1.128-2(h)(1), the employer must tell the trustee at the time of payment that the amount is a Section 128 contribution. An employee certification about the beneficiary is not enough on its own to establish that the receiving account is a valid Trump account. The employer has to verify that through the trustee, the payroll processor, or another service provider. If the employer later determines an amount was not a Section 128 contribution, proposed 1.128-2(h)(4) requires a corrective notice to the trustee, with 21 calendar days treated as a safe harbor.

Under proposed 1.128-2(d)(6), an arrangement that limits contributions to particular trustees is not a Trump account contribution program at all, because only one Trump account can exist per beneficiary. Salary reduction through a Section 125 cafeteria plan is permitted only for a dependent's account, never for the employee's own, because contributing to the employee's own account would be prohibited deferred compensation under Section 125(d)(2)(A).

Can a Partner or S Corporation Shareholder Participate?

No, and most owners will not like the answer. Proposed 1.128-1(b) defines employee by the common-law standard in Reg. 31.3401(c)-1, citing Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318 (1992). That excludes a self-employed individual under Section 401(c)(1): a partner in a partnership, a sole proprietor, a director serving only as a director, and a 2-percent S corporation shareholder under Section 1372(b).

Section 1372(b) defines a 2-percent shareholder as one owning more than 2 percent, so a 1-percent S corporation shareholder-employee is still an eligible employee, as is a common-law employee who happens to hold C corporation stock. Treasury's reasoning is structural: Section 129(e)(3) expressly pulls self-employed individuals in for dependent care, and Section 128(c) does not incorporate Section 129(e)(3).

A self-employed individual can still sponsor the program for the employees of the business, but cannot participate in it.

What to Do Now, and What to Wait On

The applicability date is plan years beginning on or after the date final regulations are published. But taxpayers may rely on these proposed regulations for plan years beginning before that date, so a 2026 program built to this framework is not a guess. Comments are due September 25, 2026, and the public hearing is set for October 15.

Do now: pull eligibility and HCE data for the classification and average benefits tests, scope the box 12 code TA earnings code with payroll, confirm the provider can carry and verify a trustee account identifier, and settle the owner question with the client, because it does not change.

Wait on: final plan document language and the corrective notice mechanics, where Treasury asked for comments on which elements are operationally hard, which makes that piece the most likely to move. The ordering rule for excess contributions across funding sources is coming in a separate rulemaking.

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