Could an employer’s contribution to a Trump account be a qualified benefit under a § 125 plan?

[Peter Gulia]

The exclusion from income for an employer’s contribution to a Trump account is Internal Revenue Code § 128.

Internal Revenue Code of 1986 (26 U.S.C.) § 125(f)(1) defines, generally, a “qualified benefit” as “any benefit which, with the application of subsection (a), is not includible in the gross income of the employee by reason of an express provision of this chapter [§§ 1®1400Z-2] (other than section 106(b), 117, 127, or 132).”

After § 128’s effective date and assuming fitting timing regarding all plan and tax years,

Could an employer’s contribution to a Trump account be a qualified benefit under a § 125 plan?

[Brian Gilmore]

Not by my reading.  Trump Accounts are a form of IRA, and IRAs are not a Section 125 qualified benefit.  Furthermore, the cafeteria plan rules are littered with the prohibition of deferred compensation through a cafeteria plan, outside of the very limited and explicitly referenced 401(k) option with cashable flex credits.

But even if I were wrong, there would be little benefit to including Trump Accounts in a cafeteria plan.  The OBBB is clear that Trump Account contributions must be nondeductible.  So there wouldn't be any way to use a cafeteria plan for a pre-tax TA contribution.  I suppose it could be interesting as an after-tax flex credit allocation option, but very few employers offer flex credits.

Here's my take--

https://www.newfront.com/blog/trump-accounts-as-an-employee-benefit

Note that there is no option for employees to contribute through payroll on a pre-tax basis to TAs because they are not a Section 125 qualified benefit.  Nor is there the option to embed tax-free TA contributions in a broader arrangement such as flex credits through a cafeteria plan or a lifestyle spending account (LSA).  The constructive receipt rules prevent any tax-advantaged approach other than standard employer contributions.  

 

Here's a couple cites--

OBBB:

(b) Trump account.

For purposes of this section—

(1) In general.

The term “Trump account” means an individual retirement account (as defined in section 408(a)) which is not designated as a Roth IRA and which meets the following requirements:

...

(c) Treatment of contributions.

(1) No deduction allowed.

No deduction shall be allowed under section 219 for any contribution which is made before the first day of the calendar year in which the account beneficiary attains age 18.

 

Prop. Treas. Reg. §1.125-1:

(o) Prohibition against deferred compensation.

(1) In general. Any plan that offers a benefit that defers compensation (except as provided in this paragraph (o)) is not a cafeteria plan. See section 125(d)(2)(A). A plan that permits employees to carry over unused elective contributions, after-tax contributions, or plan benefits from one plan year to another (except as provided in paragraphs (e), (o)(3) and (4) and (p) of this section) defers compensation. This is the case regardless of how the contributions or benefits are used by the employee in the subsequent plan year (for example, whether they are automatically or electively converted into another taxable or nontaxable benefit in the subsequent plan year or used to provide additional benefits of the same type). Similarly, a cafeteria plan also defers compensation if the plan permits employees to use contributions for one plan year to purchase a benefit that will be provided in a subsequent plan year (for example, life, health or disability if these benefits have a savings or investment feature, such as whole life insurance). See also Q&A-5 in §1.125-3, prohibiting deferring compensation from one cafeteria plan year to a subsequent cafeteria plan year. See paragraph (e) of this section for grace period rules. A plan does not defer compensation merely because it allocates experience gains (or forfeitures) among participants in compliance with paragraph (o) in §1.125-5.

(2) Effect if a plan includes a benefit that defers the receipt of compensation or a plan operates to defer compensation. If a plan violates paragraph (o)(1) of this section, the availability of an election between taxable and nontaxable benefits under such a plan results in gross income to the employees.

 

[Peter Gulia]

Brian Gilmore, thank you for your gifts to our learning.

I was not imagining a possibility of an employee’s wage-reduction contribution to a Trump account. Rather, I imagined a use of amounts an employer provides.

With your explanation, I see tax treatment difficulties.

If not under a cafeteria plan with credits a worker may apply to one’s choice of benefits, is there a slight awkwardness in an employer providing a contribution to a Trump account?

For example, if an employer provides a $1,000 contribution to the Trump account for an employee’s newborn and provides nothing for the worker in the same job in the adjacent cubicle, might some people perceive a mild unfairness in that?

[Brian Gilmore]

Sure thing.  It's definitely an issue, but of course that's an issue with lots of benefits. 

For example, the OBBB also made permanent and indexed the ability for employers to provide tax-free student loan repayment assistance under §127.  That section of the code contains no mechanism to avoid constructive receipt, and it's specifically excluded from the cafeteria plan safe harbor per the cite you copied in the original post. 

So just like tax-free employer Trump Account contributions, tax-free employer student loan repayment assistance is exclusively an employer option.  If the guy in the cubicle next to you has student loan debt and gets $1k from the company, and you already repaid your student debt, might some people perceive a mild unfairness in that?

Employee benefits are riddled with similar forms of unfairness.  Like the larger employer contribution to the health plan for families, or the fact that families with lots of kids pay the same as families with one.  The hope is you touch enough bases that everyone feels satisfied with the employer's overall strategy, and that you've hit enough contingencies as an employer to drive your recruiting/retention demands.  

Some really big name employers expressed interest in making contributions to Trump Accounts before the bill passed, but we'll see whether that actually occurs when the rubber hits the road on 7/4/26.  Those prominent names will drive a lot of the market forces in either direction here I think.

[Peter Gulia]

Thank you again, especially for the wider observation.

At least since World War II, tax law has favored specified kinds of pension, health, other welfare, education, and fringe benefits over money wages.

And that has resulted in distortions in how businesses and other employers compensate (and even hire) workers.

[Brian Gilmore]

@Peter Gulia a surprising development here, I stand corrected:

https://www.irs.gov/pub/irs-drop/n-25-68.pdf

Q. I-3: May a Trump account contribution program be offered via salary reduction under a section 125 cafeteria plan?

A. I-3: Yes, in most, but not all, circumstances. A Trump account contribution program may be offered via salary reduction under a section 125 cafeteria plan if the contribution is made to the Trump account of the employee’s dependent but not if the contribution is made to the Trump account of the employee. Although a Trump account contribution program would be a qualified benefit under section 125(f)(1), a contribution under the Trump account contribution program to a Trump account of the employee would provide deferred compensation under section 125(d)(2)(A), because the employee would have a vested right to compensation that may be payable to that individual in a later year. The Treasury Department and the IRS intend to address rules related to the coordination of Trump account contribution programs and section 125 cafeteria plans in proposed regulations.

[Peter Gulia]

Thanks. I read yesterday’s prepublication release of a not-yet-published IRS Notice describing interpretations and implementations the Treasury might intend to propose.

Among many points, I saw that Q&A about cafeteria plans.

The response treats an employer’s § 128 contribution (even if made by the employee’s wage reduction) as something “not includible in the gross income of the employee by reason of an express provision of this chapter.” That’s the § 125(f)(1) definition of a qualified benefit.

Yet, the IRS’s description of an interpretation the Treasury might intend to propose hints at a distinction between (1) a Trump account under which the § 128-contributing employer’s employee is the account’s beneficiary and (2) a Trump account under which the employee’s “dependent” is the account’s beneficiary.

Whether situation 2 always or ever is an absence of deferred compensation § 125(d)(2)(A) precludes seems doubtful. But those questions might not matter if a Treasury or IRS interpretation favors taxpayers.

In the early 1980s’ development of cafeteria plans, an important part of the reasoning was seeking to reduce perceptions that some employees get more compensation than similarly situated other employees because of differences in which benefits a worker needs, wants, or even can use.

This is not advice to anyone.

[Brian Gilmore]

Yeah I think it's weird they highlight that distinction since you can only contribute for under 18 folks anyway.  How many under 18 employees wanted to contribute to their own Trump account?  Pretty much a non-issue.

The BIG deal I think from this is that it seems to suggest employees will be able to make pre-tax salary reduction contribution elections (presumably up to $2,500, reduced by any employer contribution) for Trump accounts of a dependent.  There's no way to make deductible contributions outside of payroll.  So all of a sudden the name of the game in Trump accounts is going to be to get your employer to throw them into the cafeteria plan, and then always make sure to utilize the pre-tax option through payroll before ever considering a regular nondeductible contribution.

Given that most employers are working with a FSA TPA that offers a variety of cafeteria plan benefits in a unified login (health FSA, dependent care FSA, commuter, HSA), it seems that adding Trump accounts with employee pre-tax contributions would be an easy flip to switch to offer a pretty meaningful benefit to employees at almost no cost.

[Peter Gulia]

And Groom Law Group's article today cites BenefitsLink.

[casey72]

Totally agree that this will be a meaningful benefit. Do we think nondiscrimination rules will apply? I imagine that highly compensated would be much more likely to take advantage of this.

[Peter Gulia]

About § 125’s nondiscrimination condition, the Treasury department has done no more than propose an interpretation. More than 18 years later, that interpretation remains merely proposed.

[Peter Gulia]

Apart from differences in how highly-compensated and other employees use one’s wages, an employee population might have a skew about which employees have a dependent who is an eligible individual.

[Brian Gilmore]

Regardless of the status of the proposed cafeteria plan nondiscrimination regulations, the §125 nondiscrim rules are easy to pass.  That's not a concern.

The hard part will be that the new §128 for tax-free Trump Account contributions through and employer includes a requirement to apply rules "similar to" the §129 dependent care FSA nondiscrimination rules.  That means the dreaded 55% average benefits test will likely apply. 

That wasn't so much of a concern when it initially looked like Trump Accounts were only going to permit employer tax-free contributions, but now that employees may be able to contribute pre-tax it is very likely that HCEs will contribute disproportionately.  That will presumably cause routine failures of that 55% average benefits test in the same vein as with dependent care FSAs.

https://www.congress.gov/119/plaws/publ21/PLAW-119publ21.pdf

‘‘(c) TRUMP ACCOUNT CONTRIBUTION PROGRAM.—For purposes of this section, a Trump account contribution program is a separate written plan of an employer for the exclusive benefit of his employees to provide contributions to the Trump accounts of such employees or dependents of such employees which meets requirements similar to the requirements of paragraphs (2), (3), (6), (7), and (8) of section 129(d).’’.

[Peter Gulia]

Is the § 129(d)(8) condition measured on the whole of employees of all business organizations that together are one § 414(b)-(c)-(m)-(n)-(o) employer.

In counting who is a highly-compensated employee (for § 129 or § 128), does one count a worker who is not an employee (because she is a partner or other self-employed individual)?

In counting “employees who are not highly compensated”, does one count a worker who is not an employee (because she is a partner or other self-employed individual)?