Trump Account Guidance for Employers Expected to Ease Compliance

Tax Notes included Michael Chittenden’s commentary about newly proposed Treasury and IRS regulations governing employer contributions to Trump accounts. The proposed regulations provide detailed guidance on employee eligibility classifications, pilot program matching contributions, and the average benefits test, which practitioners said addresses many of the key compliance concerns employers had regarding Trump account contribution plans.

Michael highlighted the significance of the changes to the average benefits test, noting that “The average benefits test is difficult for some plans, maybe even a lot of plans.”

He explained that “By eliminating excluded employees and employees who don’t receive contributions from the calculation of the average benefits test,” the guidance will reduce impediments for employers seeking to satisfy nondiscrimination rules.

Michael also noted that the regulations will benefit not only Trump account contribution plans but also dependent care assistance programs because they provide parallel average benefits testing guidance for both.

At the same time, he identified several remaining challenges for employers. Regarding the corrective mechanism for plans that fail the average benefits test, Michael said it may present a “little bit of a withholding wrinkle” because income tax withholding cannot be corrected after the end of the prior year.

He explained: “The excess benefits necessary to pass the test become taxable for highly [compensated employees], and so you would be throwing those wages onto the W-2 for the prior year for highly compensated employees, but you’d be doing it without income tax withholding.”

Michael also pointed to the administrative burden employers may face in verifying contributions across multiple account providers, stating: “The employer is required to verify that the contribution is actually going into a Trump account, but they can’t limit which provider the employee is using, which seems like a bit of an administrative nightmare.”