The short answer
For most small-business owners, no. Section 128 lets an employer put up to $2,500 a year into the Trump Accounts of an employee or the employee’s dependents, excluded from the employee’s income.1 The proposed regulations published August 11, 2026 limit “employee” to common-law employees. Sole proprietors, partners (including LLC members taxed as a partnership) and shareholders owning more than 2% of an S corporation can sponsor a program for their staff, but they can’t use it for their own children.3,9
An owner who works as a W-2 employee of a C corporation can participate, but only through a written plan that passes nondiscrimination tests. Even then the contribution is free of income tax, not payroll tax: it remains wages for Social Security, Medicare and federal unemployment tax.3
| Item | Rule |
|---|---|
| Annual contribution limit per child | $5,000, indexed after 2027; employer section 128 money counts toward it, while the $1,000 pilot deposit, qualified general contributions and rollovers don’t2,4 |
| Employer section 128 exclusion | Up to $2,500 per employee per year, not per child; $2,500 again for 20271,3,6 |
| First date contributions could be made | July 4, 20262,7 |
| Federal pilot deposit | $1,000 for U.S.-citizen children with a Social Security number born 2025 through 2028, elected on Form 45475,12 |
| Income tax on section 128 contributions | Excluded from the employee’s income1 |
| Social Security, Medicare and FUTA | Still apply; section 128 contributions are wages for FICA and FUTA3 |
| W-2 reporting | Box 12, code TA7 |
| Sole proprietors, partners, more-than-2% S-corp shareholders | May sponsor a program for employees; may not participate for their own children3 |
| C-corporation owner-employees | May participate if the plan passes the nondiscrimination tests3 |
| Status of the rules | Proposed (REG-101355-26); taxpayers may rely on them until final rules apply3 |
What is a Trump Account?
A Trump Account is a new type of individual retirement account for a child, created by section 530A of the Internal Revenue Code in the 2025 budget reconciliation law, Public Law 119-21.2 A child qualifies with a Social Security number who is under 18 at the end of the year the account is elected.2 Contributions could be made starting July 4, 2026, up to $5,000 a year per child, a figure indexed only after 2027.2,4
The money has to be invested in a mutual fund or ETF that tracks a broad index of U.S. stocks, uses no leverage and charges no more than 0.1% a year.2 Generally, nothing can come out before January 1 of the year the child turns 18; after that, the account generally follows the rules for a traditional IRA.2 U.S.-citizen children born from 2025 through 2028 with a Social Security number can also receive a one-time $1,000 federal deposit under a pilot program, elected on Form 4547.5,12
How does the $2,500 employer contribution work?
Section 128 excludes from an employee’s income up to $2,500 a year of employer contributions to the Trump Account of the employee or the employee’s dependent, made under a qualifying Trump account contribution program.1 Three details matter:
- The cap is per employee, not per child. An employee with three eligible children can receive $2,500 in total across their accounts, and the cap is shared across all of that employee’s employers.1,3,6
- It counts toward the child’s $5,000 limit and creates no basis. Unlike a parent’s own after-tax contribution, the employer money is never treated as already taxed, so it will be taxable when it eventually comes out.2,4,6
- It is $2,500 for 2026 and 2027. Indexing begins after 2027.3
The program must be a separate written plan for the exclusive benefit of employees. It describes who is eligible, how contributions are made and whether employees can direct part of their pay into the program through a cafeteria plan. Those salary reductions count toward the same $2,500 limit, are free of income tax but not payroll tax, and can go only to a dependent’s account, not the employee’s own.3,6
Can a business owner use it for their own children?
This is where social media gets ahead of the rules. The proposed regulations define “employee” for section 128 as a common-law employee and state that the term does not include a self-employed individual. The preamble applies that to the people who own most small businesses:3
| Owner type | Under the proposed regulations |
|---|---|
| Sole proprietor, including a single-member LLC taxed as one | No. May sponsor a program for employees but may not participate. |
| Partner, or LLC member taxed as a partnership | No. Same treatment. |
| S-corporation shareholder owning more than 2% | No. Treated like a partner for fringe benefits under section 1372. |
| C-corporation owner who works as a W-2 employee | Yes, if the written plan passes the nondiscrimination tests. |
The S-corporation result rests on the preamble read with section 1372, which treats a more-than-2% shareholder as a partner for fringe-benefit purposes; the proposed regulation text itself cites only the definition of a self-employed individual.3,9 Taxpayers may rely on the proposed rules for plan years beginning before final rules are published, and final rules could change the details.3
What about putting my children on payroll?
The “hire your kids” strategy doesn’t rescue it in an S corporation. Section 1372 counts stock a person is considered to own under the section 318 attribution rules, and section 318 attributes a parent’s shares to the parent’s children.9,10 A child of a more-than-2% shareholder is therefore treated as a more-than-2% shareholder too. The proposed regulations don’t address attribution, so this is our reading rather than an IRS statement, but it is a strong one.
A sole proprietor’s minor child who is a genuine employee is a closer question. The child is a common-law employee, not self-employed, and the proposed text doesn’t bar a contribution to the child’s own account. The regulations don’t address the situation, and the plan would still have to pass the nondiscrimination tests. We wouldn’t build a strategy on it until final rules are out.
Is a section 128 contribution really tax-free?
For income tax, yes, up to the cap. For payroll taxes, no. The 2025 law excluded these contributions from income but added no matching exclusion to the definitions of wages for Social Security and Medicare (FICA) or federal unemployment tax (FUTA), and the preamble to the proposed regulations confirms they remain wages for both.3 Employers report them on Form W-2 in box 12 with the new code TA.7
That changes the comparison some articles make. A $2,500 contribution and a $2,500 cash bonus carry the same Social Security and Medicare tax. The difference is that the employee owes no income tax on the contribution, which goes into the child’s account rather than the paycheck. In our view, the contribution should be deductible to the business as compensation under section 162, but neither the proposed regulations nor Notice 2025-68 addresses the employer’s deduction directly.11
How can a small business offer it to employees?
For a business with staff, a section 128 program is a real benefit at a modest cost. The proposed rules require:
- A written plan covering eligible employees, contribution rules, any salary-reduction feature, how accounts are designated, certification and reporting, the plan year and correction procedures, and operation in line with it.3
- Terms that don’t favor highly compensated employees (offering the same terms to everyone eligible is the simple way to meet this), and an eligibility classification that is reasonable and nondiscriminatory, with a numerical safe harbor. Employees under 21, those with less than a year of service and certain union-covered employees can be left out of testing, and related businesses under common control are tested as one employer.3
- A 55% average-benefits test: the average contribution for employees who aren’t highly compensated must be at least 55% of the average for those who are, counting employees who actually receive contributions.3
- An optional safe harbor for programs that match the $1,000 federal pilot deposit.3
Unlike a dependent care assistance program, section 128 has no cap on the share of benefits that can go to 5% owners, which matters for a C corporation whose owner is also its highest-paid employee.1,3 On the labor-law side, Department of Labor Technical Release 2026-02 says these programs generally aren’t ERISA pension plans, provided participation is voluntary and the employer doesn’t limit how the money can be used beyond what the tax code requires, stays out of investment decisions, doesn’t present the program as its own benefit plan and receives no compensation from it.8
What should owners do now?
- Sole proprietorships, partnerships and S corporations: fund your children’s accounts with personal after-tax contributions, within the $5,000 annual limit per child, and make the $1,000 pilot election if your child qualifies. Personal contributions aren’t deductible.2 Contributions for an owner’s own family shouldn’t run through the business.
- Businesses with employees: decide whether a section 128 program fits your benefits budget. Price it with FICA and FUTA included and confirm your payroll provider can report code TA.
- C-corporation owner-employees: a program can include your own children, but only through a plan that passes the tests across your whole workforce, including employees of related businesses under common control.
- Everyone: watch for final regulations. Comments closed September 25, 2026,3 and the rules were still proposed as of November 6, 2026.