8/19/2026

Proposed Regulations Clarify DCAP Testing and Trump Account Contributions

On August 11, 2026, the Treasury Department and IRS published proposed regulations addressing employer contributions to Trump Accounts and nondiscrimination requirements for Dependent Care Assistance Programs (DCAPs). Taxpayers may rely on the proposed regulations before final regulations are published with the understanding that they may be modified. These changes may give Health and Welfare Plan Sponsors more clarity when evaluating dependent care benefits and Trump Account contributions.

Before this release, guidance on employer contributions to Trump Accounts and the mechanics of DCAP nondiscrimination testing was limited. The proposed regulations provide a framework for applying these rules, including the 55% average benefits test (AVB test) and related administrative requirements.

Background

The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, created Trump Accounts as a tax-advantaged savings vehicle for younger Americans. The law allows employers to contribute to Trump Accounts established for employees or their dependents, including through salary reduction in certain circumstances. Under the proposed regulations, salary reduction through a Section 125 cafeteria plan may be used for a dependent’s Trump Account, but not the employee’s own Trump Account. These contributions must satisfy nondiscrimination requirements similar to those that apply to DCAPs.

55% Average Benefits Test Clarification

The 55% standard itself has not changed. To pass, the average DCAP benefit for non-highly compensated employees must be at least 55% of the average DCAP benefit for highly compensated employees.

The change relates to how the testing population is determined:

Under the proposed regulations, for purposes of the 55% ABV test only, an employee is counted only if the employee receives DCAP benefits greater than zero during the plan year. Employees with no benefits may therefore be excluded from that test’s denominator; this clarification does not change the separate eligibility test. Certain employees may be excluded from the eligibility and ABV tests, including employees under age 21 or with less than one year of service, and certain collectively bargained employees, if the applicable conditions are met. For salary reduction benefits, a plan may also disregard employees whose compensation is less than $25,000 for purposes of the ABV test.

If finalized as proposed, the rules would apply to plan years beginning on or after the date the final regulations are published.

Additional Trump Account Guidance

The proposed regulations would allow salary reduction contributions to a dependent’s Trump Account through a Section 125 cafeteria plan, but not to an employee’s own Trump Account. Participants would need the ability to prospectively change or revoke these elections at least monthly, before the salary is otherwise available to the employee.

The OBBBA generally allows qualifying employer contributions of up to $2,500 per employee per year to be excluded from federal income tax. The proposed regulations would clarify how the limit applies across employers and dependents; excess or nonqualifying amounts may be taxable. The proposed regulations also include a safe harbor for certain employer matches of government pilot program contributions for the contributions-and-benefits and ABV test, provided the match is available on the same terms to all non-excluded employees. The eligibility test would still apply.

Potential Impact for Plan Sponsors

For Plan Sponsors implementing a Trump Account contribution program:

Review the written plan, payroll, notice, reporting, account-verification, and trustee communication processes.
Confirm that Section 128 contributions are identified to the trustee when made and that a process exists for corrective notices if a contribution is later determined not to qualify.

For existing DCAP sponsors:

Coordinate annual reporting; the proposed regulations permit the contribution statement requirement to be satisfied through Form W-2 reporting.
Test early enough to allow time for corrections. Certain 55% AVB test failures may be corrected by including excess benefits in the income of affected highly compensated employees by the Form W-2 furnishing deadline and providing any required corrective notice to the trustee. For 2026 testing, that deadline is February 1, 2027.
If you would like Sentinel to complete testing for your plan, please provide the completed testing sheet at least 3-4 weeks before the deadline. Find testing help here.

This material is for informational purposes only and isn’t intended to be, or to serve as, tax or legal advice. It is not a substitute for the applicable plan document, written program terms, or advice from the Plan Sponsor’s qualified legal, tax, benefits, or payroll advisers. Actual testing results, tax treatment, correction requirements, and administrative responsibilities depend on the specific facts and applicable law. Plan Sponsors should consult with their own advisors regarding how these rules may apply to their specific circumstances.

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