Employer Contributions to Trump Accounts and Nondiscrimination Rules for Dependent Care Assistance Programs, REG-101355-26, 91 FR 16314 (proposed Aug. 11, 2026)

The Department of the Treasury and the Internal Revenue Service (IRS) have released REG-101355-26, containing highly anticipated proposed regulations that provide comprehensive guidance regarding employer contributions to Trump accounts and the nondiscrimination testing rules for both Trump account contribution programs and dependent care assistance programs under Sections 128 and 129 of the Internal Revenue Code. Promulgated under the broad authority of Section 7805(a), which empowers the Secretary of the Treasury to “prescribe all needful rules and regulations for the enforcement of [the Code], including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue”, this regulatory package establishes a structured administrative framework for workforce benefit integration.

Reasons for Regulatory Release and Statutory Justification

The immediate impetus for these proposed regulations stems from Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA). The OBBBA added Section 530A, introducing Trump accounts as a new category of traditional Individual Retirement Accounts (IRAs) targeted for minors, and Section 128, which permits an exclusion from gross income for employer contributions made pursuant to a “Trump account contribution program”. Additionally, the OBBBA amended Section 129(a)(2)(A) to increase the annual dependent care exclusion limit to $7,500 ($3,750 for married individuals filing separately).

While Section 128 establishes the income exclusion, it lacks operational details and directs that the program meet requirements “similar to the requirements of paragraphs (2), (3), (6), (7), and (8) of section 129(d)”. Historically, tax professionals have struggled with Section 129 compliance because “the 55-percent average benefits test under section 129(d)(8) has been the subject of confusion for many years and has been challenging for taxpayers to apply”. Consequently, the IRS released this unified guidance to resolve long-standing operational ambiguities under Section 129 while simultaneously constructing the new regulatory infrastructure for Section 128.

Revisions, Additions, and Deletions to Existing Regulations

These proposed regulations primarily add new regulatory text rather than deleting or modifying current regulations. Under Paragraph 2 of the Proposed Amendments, “Sections 1.128-1 through 1.129-2 are added” to Title 26, Part 1 of the Code of Federal Regulations.

Although no existing regulatory text is immediately deleted, the preamble signals a planned modification. Specifically, the Treasury Department and the IRS “intend to amend Treas. Reg. § 1.125-4 to incorporate these proposed rules concerning election changes with respect to salary reduction for section 128 contributions”. This upcoming revision will formally integrate Section 128 salary reduction benefits into the standard cafeteria plan rules.

IRS Legal Analysis and Statutory Construction

In drafting these regulations, the IRS performed critical statutory analysis to justify its positions, particularly concerning the definition of “employee” and the selection of trustees:

Common-Law Employee Standard and Self-Employed Exclusion: Under Section 128, the statute does not define the term “employee.” The IRS noted that “in the absence of a contrary statutory indication, that term is interpreted under common-law principles. See Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322-24 (1992)”. By contrast, Section 129(e)(3) explicitly states that the term employee includes “an individual who is an employee within the meaning of section 401(c)(1) (relating to self-employed individuals)”. Because Section 129(e)(3) was not among the paragraphs incorporated into Section 128, the IRS concluded that “the statutory structure indicates that self-employed individuals were intentionally excluded from section 128”. Thus, while self-employed individuals may maintain a Trump account contribution program for their employees, they are strictly prohibited from participating themselves.
The Single-Trustee Restriction Ban: Commenters requested that employers be allowed to restrict contributions to a single trustee or a limited list of trustees to minimize administrative payroll burdens. The IRS rejected this suggestion. Under Section 530A, “only one Trump account may exist for a particular beneficiary”. If employers were permitted to restrict trustees, an employee whose dependent has a Trump account with a different trustee would be “precluded from receiving contributions”. Furthermore, if parents work for different employers who restrict contributions to different trustees, “at least one parent would be precluded from receiving tax-favored employer contributions”. The IRS justified this restriction by citing Section 530A(b)(1)(A)(i), arguing that the Treasury’s general rulemaking authority under Section 7805 “supports issuance of administrable rules implementing sections 128 and 530A where the statute leaves operational gaps”.

Modifications and Clarifications of Notice 2025-68 Guidance

The Proposed Regulations build upon and significantly modify the preliminary guidance issued in Notice 2025-68:

Establishment of a Corrective Notice Requirement: Notice 2025-68, Q&A I-2 established that employers must affirmatively identify Section 128 contributions to the trustee. The Proposed Regulations add a substantial corrective obligation under Proposed § 1.128-2(h)(4). If an employer subsequently determines that a contribution was not excludable, it “must provide notice in writing to the trustee identifying the affected account, the calendar year in which the contribution was made, and the amount determined not to be a section 128 contribution”. The regulations establish a safe harbor deeming “21 calendar days following the date the employer makes this determination... to be a reasonable period of time” to furnish this notice. The IRS explicitly recognized in the preamble that “the corrective notice requirement may be operationally challenging” and has requested comments on alternative validation mechanisms.
Monthly Election Change Mandate: While Notice 2025-68 permitted Section 128 salary reductions under Section 125 cafeteria plans exclusively for dependents’ accounts, it did not specify the required frequency of election changes. Proposed § 1.128-2(d)(7)(ii) modifies this by requiring that a cafeteria plan “permit participants to prospectively change or revoke elections at least monthly, before salary becomes currently available”.
Annual Limit Compliance and Recharacterization: The Proposed Regulations clarify under Proposed § 1.128-2(d)(5)(v) that “the employer does not have any obligation with respect to compliance with the section 530A(c)(2) limit”. Furthermore, the IRS detailed that contributions in excess of the Section 128 exclusion limit are “payments of compensation to the employee that are includible in his or her gross income and wages in the taxable year... and are subject to applicable employment tax reporting and withholding”.

Proposed Effective Date and Taxpayer Reliance

The regulations are proposed to apply to plan years beginning on or after the date final regulations are published in the Federal Register. However, to provide immediate administrative certainty, the preamble explicitly provides that “taxpayers may rely on these proposed regulations for plan years beginning before the date final regulations are published in the Federal Register”.

Detailed Subsection Analysis of Proposed Section 1.128-1

Proposed § 1.128-1 establishes the definitions utilized throughout the Trump account contribution program regulations:

Subsection (a) Dependent: Defines the term by cross-reference to Section 152, establishing that a child cannot qualify as a dependent of both divorced/separated parents and only one parent can claim the child for Section 128 purposes.
Subsection (b) Employee: Limits the term to common-law employees under § 31.3401(c)-1, explicitly excluding self-employed individuals.
Subsection (c) Employer: Applies common-law standards and incorporates Section 414(b), (c), (m), or (o) single-employer aggregation rules.
Subsection (d) Growth Period: Defines the period beginning at establishment and ending on December 31 of the calendar year the beneficiary turns 17.
Subsection (e) Highly Compensated Employee: Sets the definition by cross-reference to Section 414(q).
Subsection (f) Non-Highly Compensated Employee: Defines NHCEs as employees who are not HCEs.
Subsection (g) Plan Year: Specifies a 12-month period or the shorter period for which the program is maintained.
Subsection (h) Section 128 Contribution: Defines this as an employer contribution made under a qualifying program.
Subsection (i) Trump Account: Cross-references the definition in Section 530A(b)(1).
Subsection (j) Trump Account Contribution Program: Defines the program as a separate written plan for the exclusive benefit of employees meeting § 1.128-2(b) through (h).
Subsection (k) Applicability Date: Sets the prospective applicability date.

Detailed Subsection Analysis of Proposed Section 1.128-2

Proposed § 1.128-2 governs the general requirements and limits of a Trump account contribution program:

Subsection (a) Exclusion: Excludes qualifying employer contributions (including salary reductions) from the employee’s gross income.
Subsection (b) Separate Written Plan: Mandates a separate written document specifying eligibility classes, contribution rules, designation procedures, reporting procedures, plan year, and administrative correction/recharacterization procedures.
Subsection (c) Operational Compliance: Requires the employer to strictly follow the written plan’s terms.
Subsection (d) Permitted Contributions:
- Paragraph (1) Permitted Recipients: Limits contributions to accounts of beneficiaries in their growth period who are employees or dependents.
- Paragraph (2) Permitted Amounts: Restricts aggregate contributions to the annual limit.
- Paragraph (3) Impermissible Amounts: Recharacterizes non-qualifying amounts as taxable compensation.
- Paragraph (4) Certification and Reliance: Permits employers to rely on written employee certifications of relationship and birth date, but bars sole reliance on employee certification to verify account validity; the employer must use a method “reasonably designed to verify, through information provided by the trustee, payroll processor, or other service provider, that the contribution is made to a valid Trump account”.
- Paragraph (5) Annual Limits: Caps exclusions at $2,500 (2026-2027) per employee (not per dependent), allowing allocation among multiple children.
- Paragraph (6) Selection of Trustee: Prohibits restricting contributions to specific trustees.
- Paragraph (7) Cafeteria Plans: Restricts salary reductions to dependent accounts and requires prospective, at-least-monthly election changes.
Subsection (e) No Discrimination: Outlines that failure to satisfy § 1.128-3 causes the program to fail only with respect to HCEs.
Subsection (f) Notification: Requires reasonable notification of terms and availability to all eligible employees.
Subsection (g) Statement of Contributions: Requires a written statement of annual contributions, which can be satisfied via Form W-2, Box 12, using code “TA”.
Subsection (h) Employer Communications: Requires written identification of contributions to the trustee and outlines the 21-day corrective notice procedures.
Subsection (i) Applicability Date: Prospective application post-finalization.

Detailed Subsection Analysis of Proposed Section 1.128-3

Proposed § 1.128-3 lays out the nondiscrimination requirements for Section 128 programs:

Subsection (a) Contributions and Benefits: Prohibits providing more favorable terms to HCEs, requiring equal terms (e.g., identical salary reduction limits).
Subsection (b) Eligibility:
- Paragraph (1)-(2) Classification: Requires a classification based on objective business criteria (e.g., hourly/salaried, geographic location).
- Paragraph (3) Nondiscriminatory Classification: Requires satisfying a facts-and-circumstances test or a numerical safe harbor. The safe harbor is met if the plan’s ratio percentage (NHCE eligibility percentage divided by HCE eligibility percentage) is greater than or equal to the safe harbor percentage (90%, reduced by 3/4% for each 1% by which the NHCE concentration exceeds 60%).
Subsection (c) Average Benefits Test: NHCE average benefits must be at least 55% of HCE average benefits, calculated using only employees with benefits greater than zero. Paragraph (5) provides a crucial remediation rule: if the test fails on the last day of the plan year, the employer can correct the failure by including the “excess benefit amounts” in the HCEs’ gross income and wages on Form W-2 by the standard reporting deadline, plus issuing a corrective notice to the trustee.
Subsection (d) Pilot Match Safe Harbor: Disregards employer contributions that match Section 6434 pilot program contributions ($1,000 for children born 2025-2028) for the contributions/benefits and average benefits tests, provided the match is available on the same terms to all non-excluded employees.
Subsection (e) Excluded Employees: Disregards employees under age 21, those with less than one year of service, and collectively bargained employees.
Subsection (f) Contributions Taken into Account: Disregards contributions outside the formal program.
Subsection (g) Effect of Failure: Confirms that failures do not disqualify the program for NHCEs.
Subsection (h) Examples: Illustrates numerical testing and remediation.
Subsection (i) Applicability Date: Standard applicability rules.

Detailed Subsection Analysis of Proposed Section 1.129-1

Proposed § 1.129-1 updates the definitions for dependent care assistance programs:

Subsection (a) Definitions:
- Paragraph (1)-(3): Defines dependent care assistance and excludable assistance provided.
- Paragraph (4) Employee: Explicitly includes both common-law employees and self-employed individuals under Section 401(c)(1).
- Paragraph (5) Employer: Applies common-law standards and incorporates Section 414 controlled group and affiliated service group rules.
- Paragraph (6)-(7): Formally defines HCEs and NHCEs.
- Paragraph (8) Principal Shareholder or Owner: Defines as individuals owning more than 5% of stock, capital, or profits on any day of the year.
- Paragraph (9) Plan Year: Defines the standard 12-month administrative cycle.
Subsection (b) Applicability Date: Prospective application post-finalization.

Detailed Subsection Analysis of Proposed Section 1.129-2

Proposed § 1.129-2 updates and consolidates the nondiscrimination requirements for dependent care programs:

Subsection (a) Contributions and Benefits: Standardizes the “same terms” rule for all eligible employees.
Subsection (b) Eligibility: Incorporates the identical objective business criteria classification test and the 90% sliding scale safe harbor outlined in Section 128.
Subsection (c) Principal Shareholders concentration: Restates the statutory Section 129(d)(4) cap, limiting benefits to >5% owners to no more than 25% of total benefits.
Subsection (d) Average Benefits Test: Outlines the 55% average benefits test, mirroring the “employees with benefits greater than zero” denominator rules.
Subsection (e) Utilization Rates: Clarifies that utilization rates under Section 129(e)(6) apply to the owner concentration and average benefits tests.
Subsection (f) Excluded Employees: Excludes employees under 21, those with under one year of service, and collectively bargained employees.
Subsection (g) Contributions Taken into Account: Excludes payments outside the formal program.
Subsection (h) Effect of Failure: Failed plans remain qualified for NHCEs but become taxable to HCEs.
Subsection (i) [Reserved]: Retained for future use.
Subsection (j) Correction of Nondiscrimination Failures:
- Paragraph (2) Average Benefits: Allows correction of 55% test failures by including the excess benefit in HCEs’ gross income and reporting it on Form W-2 by the standard filing deadline.
- Paragraph (3) Owner Concentration: Allows similar correction for Section 129(d)(4) owner concentration failures by including the excess ownership concentration in the principal shareholders’ gross income and reporting on Form W-2.
Subsection (k) Examples: Provides practical mathematical examples.
Subsection (l) Applicability Date: Prospective application post-finalization.

Conclusion

REG-101355-26 represents a cohesive and technically sophisticated effort by the Treasury and the IRS to streamline workplace benefits under Sections 128 and 129. By providing clear safe harbors and standardizing remediation through year-end W-2 income inclusion, these proposed regulations offer tax professionals the necessary tools to implement and maintain compliant programs while maximizing workforce retirement and care benefits.

Prepared with assistance from Gemini Notebook.