TRUMP CHILD SAVINGS ACCOUNTS: A NEW BENEFIT OFFERING FOR PEOS?

Hastily assembled and inserted into the 2025 tax bill known as the One Big Beautiful Bill Act (OBBBA) is a new kind of tax-preferred savings account for children that Congress named Trump Accounts. Contributions to Trump Accounts may be made as early as July 4, 2026 (the one-year anniversary of the passage of the OBBBA), and the IRS is now racing to provide the necessary guidance and regulations. In this article, I provide some background and then explain how employer and employee pre-tax contributions to Trump Accounts could be a benefit that PEO clients may want to offer worksite employees.

WHAT IS A TRUMP ACCOUNT?

Trump Accounts are, at their core, a kind of traditional individual retirement account (IRA) for children under age 18. Once the child reaches age 18, Trump Accounts effectively turn into a traditional IRA. The period from when the account is opened to December 31st of the year before the year in which the child attains age 18 has been termed by the IRS as the “growth period.”

During the growth period, special rules apply to Trump Accounts that do not apply to a traditional IRA:

• The child need not have earnings from employment to contribute or have contributions made on their behalf.
• The contribution limit is $5,000, indexed for inflation, although certain kinds of contributions do not count towards that limit.
• No distributions are allowed during the growth period, except for rollovers to another Trump Account and transfers to an ABLE account for a disabled child.
• Only one kind of investment is allowed: a U.S. equity index fund (S&P 500 or similar) with fees of no more than 0.1% (10 basis points).
• The account must first be opened by a parent, guardian, or other authorized individual with the Department of the Treasury, who has engaged The Bank of New York Mellon Corporation and Robin Hood to operate the initial Trump Account. If the parent wants to move (roll over) the account to another Trump Account provider, they must close the initial Trump Account and move all the funds. In other words, there may be only one Trump Account open for a child at a particular time.

Once the child reaches the end of the growth period, the child will own a traditional IRA from which they could withdraw funds (owing tax and possibly a 10% penalty), convert to a Roth IRA, or maintain until retirement.

CONTRIBUTIONS TO A TRUMP ACCOUNT

The OBBBA provides for four kinds of contributions to Trump Accounts. Some contributions are made with after-tax dollars, meaning that no deduction or exclusion is available, and these contributions would be distributed tax free to the child. Other contributions are made on a pre-tax basis, and these contributions (and any earnings on after-tax contributions) would be taxable when distributed by the child. The chart below summarizes the types of contributions.

For the rest of this article, we focus on the second row: contributions made by an employer or by the employee through a cafeteria plan, because those are the contributions an employer – and therefore a PEO – might be interested in offering as an employee benefit.

EMPLOYER CONTRIBUTIONS

The OBBBA added new section 128 to the Internal Revenue Code, which provides for employer contributions to Trump Accounts on behalf of an employee’s child or other dependent (or the employee themselves if under age 18). The IRS calls these “section 128 employer contributions.” If an employer chooses to make these contributions, the employee incurs no income tax on the amount, even though this is compensation for working.

There is a $2,500 annual limit on employer contributions (indexed for inflation after 2027), and this is the limit per employee. Thus, if an employee has more than one child eligible for contributions, then contributions from the employer would need to be allocated among those children in some way. It is completely voluntary for an employer to make these contributions.

PRE-TAX SALARY DEFERRALS

As noted in the chart above, parent contributions to a Trump Account are made after tax, which limits their value. But the IRS said that an employer could allow an employee to make pre-tax contributions to a Trump Account for the employee’s child or other dependent under a section 125 cafeteria plan. In essence, the employee is “trading” salary for a section 128 employer contribution, up to $2,500, and is able to do so pre-tax.

This is a big deal because, like a flexible health spending account, it creates an opportunity for pre-tax contributions that do not require an expenditure from the employer other than the cost of administering the program.

WILL EMPLOYERS EMBRACE TRUMP ACCOUNTS?

At this point, most employers are taking a wait and see approach. For one thing, even though contributions can be made as early as July 4, 2026 (assuming the government is ready to accept them), most employers have already made 2026 benefit decisions and soon will do the same for 2027. We have also heard that some employers may not offer benefits associated with Trump Accounts for now, because they fear the name might offend some of their employees. (Some speculate that Democrats might seek to change the name in the future, and at least one bill has been introduced to do that.) Other employers have concluded that the vast majority of their employees would prefer to have limited benefit dollars put into something else.

Perhaps just as important, there are many unanswered questions about section 128 employer contributions that make it hard to implement a program at this time. The IRS has promised guidance, but that might not come until much later in 2026 or 2027.

The biggest questions relate to nondiscrimination testing. A section 128 employer contribution program is subject to rules similar to those for a dependent care assistance program (DCAP) under Code section 129. DCAP programs involve nondiscrimination testing rules for which IRS has not provided guidance, including a rule requiring that the average benefits provided to employees who are not highly compensated is at least 55 percent of the average benefits provided to highly compensated employees. In fact, many DCAP programs routinely fail this test and must correct or limit DCAP benefits to highly compensated employees.

Another question relates to FICA taxes—the OBBBA did not provide an exclusion for employer contributions, so it is possible these amounts could be wages for FICA purposes. Finally, we are expecting guidance from the Department of Labor on how an employer can structure a Trump Account contribution program that does not subject it to ERISA.

IMPLICATIONS FOR PEOS

If employer contributions or pre-tax salary deferrals to Trump Accounts becomes a common benefit offering, PEOs are well-positioned to offer it to small businesses who otherwise do not have the bandwidth to administer it. The program will have some unique administrative challenges, such as the need to send funds to multiple Trump Account providers, special reporting to the account custodian, and nondiscrimination testing. PEOs wanting to learn more should keep an eye out for more guidance from the IRS.

This article is designed to give general and timely information about the subjects covered. It is not intended as legal advice or assistance with individual problems. Readers should consult competent counsel of their own choosing about how the matters relate to their own affairs.