IRS Issues Guidance on Child Savings Accounts for Families and Employers

The IRS and U.S. Treasury Department recently released guidance clarifying how the new Section 530A accounts (also known as "Trump Accounts") will operate, including rules for employer contributions and the automatic enrollment of eligible children. Created by the One Big Beautiful Bill Act (OBBBA), these tax-advantaged savings accounts are designed to help children build long-term financial security. While parents and grandparents can contribute, the new guidance also sheds light on how businesses can offer contributions as an employee benefit.

Automatic Enrollment for Eligible Children

Under temporary regulations released in September, the Treasury Department automatically established "auto accounts" on Oct. 1, 2026, for eligible children who didn't already have a 530A account. (The regs also call for additional auto accounts to be established periodically.) Earlier regs didn't provide this broad automatic enrollment and have been withdrawn and replaced by these new temporary regs.

An auto account can receive a $1,000 government-funded deposit available to U.S. citizen children born from Jan. 1, 2025, through Dec. 31, 2028 - but only if a parent, guardian or other eligible individual makes the required election and claims the account through the Treasury Department's electronic process. Auto accounts can also receive certain "qualified general contributions" by donors (more information below).

To accept other types of contributions, including employer, parent or other family contributions, the auto account must first be claimed by a parent, guardian or other eligible individual. The claimant must verify his or her identity and legal authority through an electronic process.

The temporary regs also provide a framework for the aforementioned qualified general contributions, under which eligible donors (governments or tax-exempt organizations) can fund accounts for a specified class of children through the Treasury Department. These contributions generally must be made in equal amounts to the accounts of all eligible children in the designated class. The temporary regs also permit certain contributions of publicly traded stock to qualify.

Employer Contribution Program Requirements

Under the OBBBA, employers can annually contribute up to $2,500 per employee (adjusted for inflation after 2027) to the 530A accounts of employees' dependents (or of employees, if they're young enough to still be eligible). Contributions generally are excluded from the employee's federal taxable income. (Social Security, Medicare and federal unemployment taxes generally still apply.)

Under regulations proposed in August, a qualified contribution program would have to be governed by a separate written plan for the exclusive benefit of its employees and satisfy several additional requirements. The plan would have to specify the:

• Classes of eligible employees.
• Rules governing employer contributions, including the amount of contributions and whether contributions may be made via a Sec. 125 cafeteria plan.
• Procedures for an employee to designate the account to receive contributions.
• Certification, notice and reporting procedures.
• Plan year.
• Procedures for correcting administrative failures and furnishing notices to employees and trustees when amounts previously designated as employer contributions are subsequently determined not to be excludable.

A program that doesn't adhere to its written plan wouldn't constitute a 530A account contribution program under the proposed regs. So, any contributions would be subject to federal income tax.

Notably, the proposed regs define "employee" more narrowly than some had expected. Self-employed individuals - including partners, sole proprietors and 2% S corporation shareholders - wouldn't be able to participate in such a program under the regs. But these exclusions wouldn't prevent sole proprietors, partnerships or S corporations from offering a program to their eligible employees.

Who Qualifies for Employer Contributions

Employers can make contributions only if the beneficiary is:

1. An employee or an employees' dependent.
2. In their growth period, which runs from the establishment of the account to Dec. 31 of the calendar year in which the beneficiary reaches age 17.

The proposed regs would allow employers to rely on written employee certifications representing:

• The beneficiary is the employee or anticipated to be the employee's dependent for the taxable year the contribution is made.
• The beneficiary's date of birth.
• No facts are known to the employee that would make the beneficiary ineligible to receive a contribution.

Employers could rely on such a certification unless they have actual knowledge the certification is incorrect.

However, an employer couldn't rely solely on an employee certification to establish the recipient account is valid. The employer would have to use a method reasonably designed to verify the contribution is made to a valid account. Verification could use information from the trustee, payroll processor or another service provider.

Nondiscrimination Requirements

Employer contribution programs can't favor highly compensated employees (HCEs) or their dependents. The rules for compliance largely mirror those for dependent care assistance programs.

Among other things, programs must satisfy the contributions and benefits, eligibility and average benefits tests. If a program doesn't satisfy these tests, HCEs could lose the income exclusion for some or all contributions for federal tax purposes.

The August proposed regs recognize that some major employers have indicated they intend to match the $1,000 government contributions for certain children. They'd permit employers to disregard such matching contributions for purposes of the contributions and benefits test, as well as the average benefits test, if the contributions are made available on the same terms and conditions to all employees who aren't excluded for nondiscrimination test purposes. This relief wouldn't eliminate the eligibility test.

Additional Considerations

The August proposed regs address several other areas related to employer contributions, including:

• Payroll deductions. The proposed regs would allow employees to make pretax contributions through a cafeteria plan to a dependent's 530A account, but not to their own accounts. A cafeteria plan offering this benefit would have to specifically describe it and allow participants to prospectively change or revoke their salary-reduction elections at least monthly. Any change or revocation would have to take effect before the affected salary becomes currently available.
• Shared limits. Employer-funded and salary-reduction contributions through a cafeteria plan share the $2,500 limit. These contributions also count toward the account's general $5,000 annual contribution limit. (The $1,000 pilot program contribution and qualified general contributions don't count toward the $5,000 limit.) The proposed regs clarify that, if an employee has multiple employers in a year, the total contributions the employee can exclude from income across all employers can't exceed the applicable annual limit.
• Employee notices. Under the proposed regs, employers would be required to provide eligible employees notification of the availability and terms of the contribution program. They also would be required to provide a statement showing the amount of contributions made for an employee in the previous calendar year (for example, on Form W-2).

Looking Ahead

The September temporary regs apply to tax years beginning on or after Jan. 1, 2026, and expire on Sept. 30, 2029. The August proposed regs would apply to plan years beginning on or after the date final regulations are published.

These temporary and proposed regs provide important details for both families and businesses, but more guidance is expected. Parents should understand how an auto account works and what's required to establish a receiving account before making additional contributions. Businesses considering an employer contribution program should also review the proposed rules and their administrative requirements. Our tax pros are here to help you understand how the evolving guidance may affect you or your business.