Seyfarth Synopsis: The IRS has issued another round of guidance on Trump Accounts, this time addressing employer contributions to Trump Accounts and eligible investments in which Trump Account funds may be invested. While the new guidance answers many of the questions we have all been asking since these investment accounts were originally announced, there are still operational and administrative challenges that remain unresolved. Employers considering whether to contribute to Trump Accounts on behalf of their employees can begin evaluating administrative capabilities now; however, additional guidance will likely be necessary before full implementation is possible.
As discussed in our prior publications, including “Trump Accounts: The New Kid on the IRA Block” and “No ERISA Strings Attached: The DOL Weighs In on Employer and Employee Contributions to Trump Accounts”, regulators have been slowly rolling out guidance since the announcement of Trump Accounts. Earlier guidance focused on how to establish a Trump Account, the pilot program for a $1,000 seed contribution by the government for certain eligible children, and the Department of Labor’s (“DOL’s”) confirmation that properly structured employer contributions to Trump Accounts generally will not create an ERISA-covered plan. The latest round of guidance, which came in the form of two sets of proposed regulations (“Proposed Rules”), covers two key issues:
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- How employer-sponsored contributions to Trump Accounts will operate; and
- How Trump Account assets may be invested before a beneficiary turns 18.
Implementing a Trump Account Contribution Program
Under the Proposed Rules, employers seeking to contribute to Trump Accounts on behalf of employees (or more typically, eligible dependents of employees) must satisfy the following requirements for a Trump Account contribution program (a “Program”):
- Plan Document Requirement. A Program must be established under a separate written plan document that outlines eligibility rules, contribution procedures, account designation requirements, correction procedures, employee communications, and other administrative information and processes (such as certification and reporting). Employers sponsoring a Program will be expected to adhere to the terms of the plan document.
- Tax-Advantaged Contributions and Limitations. Contributions to a Program, whether by the employer or by the employee on a pre-tax basis, are facilitated under Section 128 of the Internal Revenue Code (“Section 128 Contributions”). Section 128 Contributions are permitted up to a maximum dollar limit of $2,500 (subject to inflation adjustments). As discussed in prior publications, this limit applies per employee; not per eligible dependent. Employees can make pre-tax contributions to Trump Accounts on behalf of their eligible dependents (but not themselves) through a Section 125 cafeteria plan, so long as the employer’s cafeteria plan specifically references the Program and allows employees to change their Program elections at least once a month.
a. Wage Withholding. Employer and employee pre-tax contributions to a Program are considered “wages” subject to FICA, FUTA, and RRTA; however, qualifying employer contributions and employee pre-tax contributions may be excluded from income for purposes of federal income tax.
b. After-Tax Contributions. Recent DOL guidance clarified that employers can also facilitate post-tax employee contributions to Trump Accounts. Because these after-tax contributions would be separate from any employer or pre-tax employee contributions made pursuant to Section 128, the $2,500 employer contribution limit would not apply to any employee contributions made on a post-tax basis. However, these after-tax employee contributions would be subject to the annual contribution limit of $5,000 per eligible dependent per year (subject to inflation adjustments).
- Eligibility Requirements. Section 128 Contributions are permitted only during the Trump Account’s “growth period” (generally ending the calendar year before the year in which the beneficiary turns 18).
a. Certification and Verification. One of the more employer-friendly aspects of the proposal is Treasury’s willingness to permit reliance on employee certifications for certain eligibility requirements. Rather than requiring employers to independently verify every dependent’s age and dependent status, the proposal generally permits employers to rely on employee certifications, provided that employers verify that contributions are being made to an actual Trump Account.
b. “Employees” and “Dependents”. The Proposed Rules clarify how an “employee” and “dependent” are defined for purposes of receiving employer contributions. An employee’s dependent must satisfy the Code Section 152 requirements in order for the employee to receive employer contributions to their dependent’s Trump Account. Further, self-employed individuals, including partners and 2% shareholders of an S corporation, do not qualify as employees.
- Nondiscrimination Rules. As expected, certain rules will apply to Section 128 Contributions to a Program that prohibit discrimination in favor of highly compensated employees (“HCEs”). The nondiscrimination rules closely track three of the nondiscrimination rules that apply to dependent care flexible spending accounts. Under the Proposed Rules, Section 128 Contributions will be required to satisfy: (1) the contributions and benefits test; (2) the eligibility test; and (3) the 55% average benefits test. For employers that agreed to match the pilot program $1,000 seed contribution from the government, a nondiscrimination safe harbor allows employers to disregard any contributions made for this purpose under the contributions and benefits test and 55% average benefits test.
- Trustees. Unlike employer contributions to a Health Savings Account, employers cannot limit contributions under their Program to Trump Accounts held by a particular trustee. Informally, Treasury has indicated it is looking into establishing a conduit system where all employer contributions (and presumably employee pre-tax contributions) can be funneled and then distributed out to the individual Trump Accounts.
- Notices and Reporting. The Proposed Rules reference notices to employees, annual statements, and reporting obligations involving account trustees. More detail will be needed on how those obligations will be met.
Investment Rules
Fortunately, employers do not have the fiduciary responsibility of selecting available investments for their Program. The investments will be selected by the trustees holding the individual Trump Account funds. Treasury previously announced that all contributions to Trump Accounts would be defaulted to the State Street SPDR Portfolio S&P 500 ETF (SPYM). This is an index fund which tracks the performance of the S&P 500 index. In the same announcement, Treasury listed four other low-cost exchange traded funds that may be used for Trump Accounts.
The Proposed Rules elaborated on permissible investments, directing that the focus be on diversification and low costs to help savings grow over the long term. The Proposed Rules also specify that Trump Account funds may not be invested in index funds that correspond to environmental, social, and governance (ESG) indices.
Potential Challenges
Although the Proposed Rules address some of the key questions relating to Trump Account administration, a number of potential challenges remain for employers, including:
- Identifying and tracking eligible dependents through HR/payroll systems (even if self-certified).
- Coordinating contribution elections among multiple employers within the same controlled group.
- Validating account information.
- Processing contribution corrections.
- Satisfying annual reporting obligations.
- Administering programs for employees with multiple eligible children.
We will continue to monitor developments as Treasury and the IRS work toward final regulations and additional operational guidance.
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