Unlike a 529 plan that locks money into tuition bills, or a custodial Roth IRA that requires employment, Trump Accounts let parents, grandparents, even employers (yes, employers) start stashing away cash from birth, with the government even kicking in the first $1,000 for eligible newborns.
Over recent months, the Department of the Treasury released newly proposed guidance about Trump Accounts and how they affect employers and their benefit programs. The guidance is not final; however, employers should now have sufficient information to evaluate these programs as an additional benefit offering.
So, what exactly are these accounts, how do they work, and how do they impact employers like you? Let’s break it down.
Contributions
Trump Accounts have a designated “growth period” and during this period, special rules apply. The growth period begins when the account is established and ends on December 31st of the year in which the account’s beneficiary turns 17. After the growth period, most of the special rules no longer apply and traditional IRA rules are applicable.
Contributions are allowed from several sources, but these contributions are not tax-deductible for individuals or beneficiaries during the growth period. These are considered gifts under tax law. Contributions are not limited to the beneficiary’s compensation for the year, unlike a traditional IRA.
During the growth period, there is an annual combined limit of $5,000 (indexed for inflation). Contributions in excess of this combined limit will receive an annual 6% penalty until corrected.
Employer and employee contributions are accepted during the growth period, and tax-free up to a combined limit of $2,500 (indexed for inflation) per employee. This can be done through an employer established Trump Account contribution program. State and local government employers, as well as 501(c)(3) organizations, can also make tax-free contributions to these accounts on behalf of their employees through one of these programs.
The proposed regulations outline requirements for employers who maintain a Trump Account contribution program. This program would mean a separate written plan of an employer for the exclusive benefit of its employees to provide contributions to the Trump Accounts of such employees or dependents of such employees. According to the new guidance, employers would need to meet certain requirements including:
- Maintain a separate plan document
- Provide annual statements for employees
- Provide reporting to Trump Account trustee
- Satisfy the nondiscrimination requirements
- Provide various notices and certifications
Arrangements that fail to satisfy a requirement for a Trump Account contribution program would not be considered and would not be excludable from gross income.
The program can allow an employer to require certain employee certifications, but employers cannot rely solely on these certifications to confirm establishment of the Trump Account. If required, the employee certification must be in writing (paper or electronic) and include; the account beneficiary, their date of birth, and confirmation that there are no facts known that would make the beneficiary ineligible within that contribution year.
Employers must use a method to verify contributions are made to a valid Trump Account by using information from the trustee or payroll processor. One suggested means of verification is through employer-assigned account numbers. These methods are still being ironed out by the Treasury Department.
Investments
Eligible investments for Trump Accounts are determined by the growth period. During this time, savings must be invested in a mutual fund or ETF that tracks a qualified index. These funds must be unleveraged and have an expense ratio of 0.10% or less.
Qualified indices can include the S&P 500 index or any equity index composed of mostly U.S. stocks. Market capitalization-based indices are qualified, but industry and sector-specific indices are not eligible.
After the growth period concludes, investment options and contribution limits operate in a similar fashion to Traditional IRAs.
Distributions
No distributions are allowed from these accounts during their growth period, unless to be rolled over into an ABLE Account.
Similarly to traditional IRAs, distributions before age 59½ are subject to an additional 10% tax penalty. Exceptions to this penalty include:
- Higher education expenses
- First home purchase ($10k limit)
- Birth or adoption expenses ($5k per child)
- Emergency personal expenses ($1,000 annual limit)
- Medical expenses and other specific uses
Post-growth period distributions follow the same rules as traditional IRAs. After the growth period, Trump Accounts can be converted to a Traditional or Roth IRA.
Planning Ahead
Final regulations and guidance are still being sorted out by the IRS and Treasury Department. However, the proposed guidance provides us with a sneak peak of how these accounts might function and how they may impact employers. Administration and operational complexities continue to be the main concern for employers who are thinking about establishing these programs. Tracking, validation, and unique contribution caps may become a barrier when evaluating this offering for employees. Since this program is so new, we also expect a lack of vendor support in the initial phase.
Your organization’s retirement plan is complex, full of ever-changing details, regulations, and oversight. We have built our reputation on understanding those complexities and helping plan sponsors build strong retirement plans. If you have any questions about this topic, please contact our team.
Sources: 26 USC 530A Congress Federal Register: Employer Contributions to Trump Accounts and Nondiscrimination Rules for Dependent Care Assistance Programs