Trump Accounts: What employers need to know about the new guidance

The federal government spent months building excitement around Trump Accounts, the new tax-advantaged savings vehicle for children under 18. What it hadn't done, until this week, was tell employers exactly how to offer them as a workplace benefit.

That changed on Aug. 11, when the U.S. Department of the Treasury and the Internal Revenue Service (IRS) released proposed regulations covering employer-sponsored Trump Account programs, including rules letting employees defer pretax dollars from their paychecks into a dependent's account.

That's a meaningful shift for companies that have been sitting on the sidelines, according to Jim Earle, a partner at Troutman Pepper Locke in Charlotte, North Carolina, who leads the firm's tax and benefits practice group.

"There was a fair bit of hesitancy from employers because of uncertainty around the rules," Earle said. "I think a lot of employers were sitting on their hands. This at least moves things forward on those issues, at least on a proposed rule basis."

What the new guidance actually settles

The proposed rule lays out two distinct paths for funding a child's Trump Account. Employers can contribute up to $2,500 per employee's dependent, tax-free, directly. Separately, employees can now defer their own pretax dollars through payroll into that same account.

Earle pointed to two design features in the proposed rules meant to make setup easier for employers. The first is pretax contributions routed through a cafeteria plan, the same pretax benefit structure many employers already use for health premiums and dependent care.

The second is what he called a safe harbor for employers matching the $1,000 federal pilot contribution. Normally, an employer benefit has to pass a nondiscrimination test to make sure it doesn't disproportionately favor highly paid employees. This exception lets employers skip that test for the pilot match specifically, as long as they offer the same match amount to every employee with an eligible child, regardless of how much that employee earns.

"It's clear Treasury is trying to make rules that they think will make it easier, rather than harder, for employers to put these programs into place," Earle said.

Before this week, employers had almost nothing to work from beyond a single Department of Labor clarification that Trump Account programs won't be treated as plans under the Employee Retirement Income Security Act (ERISA). This is the first real attempt to answer the basic operational questions, like contribution limits and how a program fits alongside a company's existing cafeteria plan.

The plumbing problem employers now face

Setting up a Trump Accounts program means drafting a written Section 128 plan document spelling out eligibility and contribution details.

"That's not nothing. It's not just like you snap a finger," Earle said. "Then you've got to work with your payroll folks to see if you can make it happen."

Employees can change their Trump Account elections throughout the year, unlike most cafeteria plan elections that lock in at the start of the year, but that flexibility only helps if a payroll provider can execute it. Federal Insurance Contributions Act (FICA) taxes still apply to these contributions, unlike most other pretax cafeteria deductions, Earle said, and employees can move their account from Treasury's selected providers to another trustee at will, meaning an employer's plan has to send contributions wherever that account ends up.

"Most payroll programs are wired to send money to one preset place," Earle said. "Now what if you've got to wire to financial services companies A, B, C, D, E, F and G? People aren't sure how hard that's going to be."

Nondiscrimination testing raises another challenge. The proposed rule introduces three tests under Section 129 standards for the first time, and Earle said the eligibility test still isn't fully resolved, since only employees with qualifying children can open an account.

"What if you're a workforce where the only person who could ever open one of these is a highly compensated employee? Is that discriminatory in eligibility, or not?" Earle said. "Probably not the intent. The intent is probably that anybody with an eligible child could make a contribution, and that's the same rule for everybody. But the proposed reg on its face isn't totally clear."

Should employers move now or wait

Earle's advice starts with a basic question: is there actual demand from employees?

"It's going to take time and money to create a 128 program that complies with these rules," he said. "Is the return on investment worth it? Do your employees want it? Depending on people's life stage, putting money into an HSA or a 529 plan might be way more valuable."

That tradeoff is part of understanding what benefits employees want most, rather than assuming a headline-grabbing benefit makes sense for every workforce.

Company philosophy matters too. Earle pointed to that same safe harbor as a possible entry point for employers who want to support the program without building a full contribution plan. Some employers in his market, including Bank of America in Charlotte, have already talked publicly about helping employees open Trump Accounts for their kids, though smaller employers tend to prioritize other benefits first, part of building financial wellness into the benefits package.

"It's going to be way more important to have a group health plan that's reasonably affordable, or a 401(k) with the right bells and whistles," he said. "I just don't know how this will get to that priority level."

A benefit that could miss the people who need it most

Earle's biggest concern isn't in the regulations at all. Because Trump Accounts require a parent to opt in, he worries the families most likely to act are the ones already comfortable navigating markets, while lower-income families miss out on the $1,000 in free federal seed money.

"It's one of the frustrating things to me about this program," Earle said. "If we do nothing else, we can guess who's going to act: people who understand markets, or who can put in $5,000 a year. I think it's going to miss out on a lot of people."

Employers with large hourly or retail workforces could help close that divide simply by making sure employees know to claim the $1,000 federal seed money, Earle said, something companies can do even without setting up a formal Trump Account contribution program of their own.

Earle sees the proposed rule as progress rather than a finish line. A previous look at Trump Accounts soon after they launched found billions in early funding but little clarity on how employers should act. This week's guidance, building on the original notice that first mapped out how the accounts would work, answers some questions and leaves others for the comment period ahead of an October hearing.

"I think the proposed reg, depending on how it gets finalized, is a step in the right direction," Earle said. "They're clearly trying to remove obstacles for employers. I just think this is a partial step."