Employer Contributions to Trump Accounts, and the New DCAP Testing Rules

An employer can contribute up to $2,500 a year to the Trump accounts of its employees or their children, and the employee doesn't pay income tax on it (IRC §128). Proposed regulations issued August 11, 2026 (REG-101355-26) set the plan and testing rules. The short version for owner-run businesses: you can offer it to your employees, but under the proposed rules you can't benefit from it yourself.

What section 128 allows

Section 128 was added by P.L. 119-21, the 2025 budget reconciliation act, for taxable years beginning after December 31, 2025. It excludes from an employee's income amounts the employer contributes to the Trump account of the employee or a dependent, up to $2,500 per employee per year, with inflation adjustments starting after 2027 (IRC §128(a), (b)).

A few points from the statute and the proposed regulations:

• It must be a separate written plan for the exclusive benefit of employees (IRC §128(c)). The proposed rules list what the plan document has to say: who's eligible, the contribution terms, how employees designate an account, notices and the plan year (Prop. Treas. Reg. §1.128-2(b)).
• The limit is per employee, not per child. An employee with two children can split one $2,500 contribution between their accounts, but not receive $2,500 for each (Prop. Treas. Reg. §1.128-2(d)(5)(iv)).
• It counts toward the account's overall limit. Trump accounts generally take no more than $5,000 a year of contributions, and section 128 contributions count toward it (IRC §530A(c)(2)(A); REG-101355-26 preamble). The government's $1,000 pilot deposit for children born in 2025 through 2028 doesn't count (IRC §6434).
• Salary reduction is allowed only for a dependent's account. A section 125 cafeteria plan can offer it for an employee's child, but not for the employee's own account (Prop. Treas. Reg. §1.128-2(d)(7)).
• The employer can't pick the trustee. A plan that limits contributions to accounts at a particular trustee doesn't qualify (Prop. Treas. Reg. §1.128-2(d)(6)).

Anything the employer puts in outside the plan, or above the limit, is ordinary wages subject to withholding and payroll tax.

Owners can sponsor it but can't participate

This is the point that matters most for owner-run businesses. The proposed regulations define "employee" under the common-law standard and exclude self-employed individuals within the meaning of IRC §401(c)(1). The preamble names who that covers: partners, sole proprietors, directors acting only as directors, and 2-percent shareholders of an S corporation under IRC §1372(b) (Prop. Treas. Reg. §1.128-1(b); REG-101355-26 preamble, Part III.A.4).

Those owners can maintain a plan covering their employees, but they can't take part in it. Treasury's reasoning is that section 128 borrows some of the dependent care rules but not the DCAP definition of employee in IRC §129(e)(3), which expressly includes self-employed individuals.

The testing rules

Section 128 adopts the DCAP nondiscrimination rules except the owner concentration test. The proposed regulations would apply three tests (Prop. Treas. Reg. §1.128-3):

1. Contributions and benefits can't favor highly compensated employees (HCEs) under IRC §414(q). Offering the same terms to everyone eligible satisfies this.
2. Eligibility must follow a reasonable classification, such as salaried versus hourly or a location, not a list of names. There's a safe harbor: the plan's ratio percentage must meet a safe harbor percentage that starts at 90% and drops as the share of non-highly compensated employees (NHCEs) in the workforce rises.
3. Average benefits. The NHCEs' average contribution must be at least 55% of the HCEs' average, tested on the last day of the plan year. For salary reduction benefits, employees paid under $25,000 can be disregarded.

Employers that match the government's pilot deposit get a safe harbor: a match offered on the same terms to all employees for children eligible for the pilot program is disregarded for the benefits and average benefits tests (Prop. Treas. Reg. §1.128-3(d)).

If the average benefits test fails, the fix is to treat the HCEs' excess as taxable wages on their Form W-2 and send a corrective notice to the account trustee. The proposed rules treat 21 days as a reasonable time for that notice (Prop. Treas. Reg. §§1.128-2(h)(4), 1.128-3(c)(5)).

A worked example

This is an example with round numbers, not any business. A company with a calendar-year plan contributes to employees' children's accounts through salary reduction. One HCE contributes the full $2,500, and the participating NHCEs average $1,100. That's 44% of the HCE average, below 55%, so the test fails.

To correct it, divide the NHCE average by 0.55: $1,100 ÷ 0.55 = $2,000. The HCE's contribution above that, $500, is reported as taxable wages, and the employer notifies the trustee that the $500 isn't a section 128 contribution.

What changes for dependent care plans

The same proposed regulations rewrite the DCAP nondiscrimination rules under IRC §129 using the same framework: a reasonable classification with the same safe harbor, the 55% average benefits test and an income-inclusion correction (Prop. Treas. Reg. §1.129-2). Two things differ from Trump accounts:

• The DCAP exclusion limit is $7,500 a year for taxable years beginning after 2025 (IRC §129(a)(2)(A)).
• DCAPs keep the owner concentration test: no more than 25% of the year's benefits can go to shareholders or owners who hold more than 5% of the business, counting their spouses and dependents (IRC §129(d)(4)). The proposed rules add a way to correct a failure by taxing the excess to those owners.

For a small business where the owners have young children, that 25% test is the one that usually decides whether the DCAP works.

Where things stand, and what I'd do

The proposed regulations would apply to plan years beginning after final regulations are published, but employers may rely on them now. Comments closed September 25, 2026. The public hearing on October 15, 2026, is now telephonic only (FR Doc. 2026-20021).

• Decide whether a Trump account plan fits your workforce. Since owners are out, it's a benefit for your employees, which is a fine reason to offer it.
• If you offer it, put a written plan in place before the first contribution, and have payroll confirm it can report section 128 amounts on Form W-2.
• Have employees certify each child's eligibility in writing, and verify the account through the trustee or payroll provider. The proposed rules don't let you rely on the employee's word alone that an account is valid.
• If you run a DCAP, test the 25% owner rule and the 55% average benefits test before year-end, while there's still time to adjust elections.

I'm glad to work through the testing for a specific plan year. Send an inquiry, or see how I handle tax planning for businesses.

General information, not advice for your situation. The rules here are for 2026, based on proposed regulations that may change when finalized, as checked on the date above.