The Trump Account Tech Release addresses only the ERISA treatment of Trump Accounts. It does not resolve the many outstanding operational, tax, and administrative questions – we expect that the Treasury Department/IRS will issue additional guidance soon. See our previous alerts here, here, and here.
Background
Trump Accounts are a new type of traditional IRA established for the exclusive benefit of an eligible individual and designated as a Trump Account at its establishment. Trump Accounts are subject to a number of rules inapplicable to other IRAs, but most of these rules apply only during the “growth period” – the period ending before January 1 of the calendar year in which the account beneficiary turns 18. After the growth period, the account is generally governed by the Code section 408 rules applicable to traditional IRAs.
During the growth period, a Trump Account may receive contributions from five different sources, including employer and employee contributions that are not includible in the gross income of the employee under Code section 128 through an Employer Contribution Program.
Employers may make employer contributions and allow employee pre-tax contributions to the Trump Accounts of employees or their children. Because these contributions can only be made to the Trump Account of someone under age 18, in the vast majority of cases, contributions through an Employer Contribution Program will be made to a Trump Account established for the benefit of an employee’s dependent child rather than a Trump Account established for an employee’s own benefit. Many stakeholders have requested guidance from the DOL clarifying whether Trump Accounts are subject to ERISA. In response to these stakeholder requests, the DOL issued this Tech Release.
Tech Release
ERISA section 3(2) defines an “employee pension benefit plan” as “any plan, fund, or program . . . established or maintained by an employer . . . to the extent that by its terms or as a result of its circumstances such plan, fund, or program . . . provides retirement income to employees, or results in a deferral of income by employees for periods extending to the termination of covered employment or beyond . . . ”
A. Trump Accounts for Employees’ Dependents
ERISA section 3(2)’s definition of “employer pension benefit plan” only includes plans that provide retirement income to employees or results in a deferral of income by employees. Trump Accounts generally provide benefits to an employee’s dependent rather than to the employee him/herself. Thus, the Tech Release provides that employer involvement in Trump Accounts for employees’ dependent will not constitute “employer pension benefit plans” under ERISA, even when funded in whole or in part through an Employer Contributions Program. For the substantial majority of Trump Account contribution programs, this will likely be the beginning and end of the ERISA inquiry.
GROOM INSIGHT: This guidance provides welcome relief for employers that are considering adopting an Employer Contribution Program and should result in additional uptake by employers. If employers only fund Trump Accounts established for the benefit of employees’ dependents, then this will function as a straightforward safe harbor for ERISA exemption.
B. Trump Accounts for the Benefit of Employees
The DOL acknowledged that, under certain circumstances, an employee – rather than a dependent – could be the account beneficiary. In that case, employer involvement could implicate ERISA. The DOL addressed two scenarios and set forth different ERISA safe harbor exemption rules for each: (1) contributions through an Employer Contributions Program (which may occur only during the growth period); and (2) employee after-tax payroll contributions not made through an Employer Contribution Program.
- Employer Contribution Program Contributions During the Growth Period
An “eligible individual” may be an employee who is age 16 or 17 during the growth period, so Employer Contribution Program contributions to that employee’s Trump Account could cause the arrangement to resemble an employer-established pension plan. In that situation, the DOL points to its IRA safe harbor regulation. Under that regulation, a “pension plan” does not include a Code section 408(a) IRA where four conditions are met: (1) there are no employer contributions; (2) employee participation is voluntary; (3) the employer does not endorse the program; and (4) the employer receives no consideration beyond reasonable compensation for administrative services in connection with payroll deductions.[1]
An Employer Contribution Program fails the IRA safe harbor’s first condition because there are employer contributions. However, the DOL concluded that the IRA safe harbor is not dispositive, demonstrating the extent to which DOL needed to be creative to reach the conclusion that the Trump Account arrangement is exempt from ERISA. In this regard, the DOL stated that employer contributions “are not necessarily significant” in analyzing a Trump Account’s status under ERISA because: (1) Treasury creates the initial Trump Accounts; (2) the accounts are controlled solely by the responsible party on behalf of the account beneficiaries; (3) investments are strictly controlled by the Code; and (4) employers have “no meaningful role” in the operation of the account.
On that basis, the DOL concluded that Employer Contribution Program contributions during the growth period will not give rise to an ERISA-covered plan where:
- participation is completely voluntary; and
- the employer does not:
- impose conditions on the use of Trump Account funds beyond those permitted under the Code;
- make or influence investment decisions with respect to the funds;
- represent that the accounts or program are an employee pension or welfare benefit plan established or maintained by the employer; or
- receive any payment or compensation in connection with a Trump Account.
GROOM INSIGHT: There is a footnote in the Tech Release that may have implications for the recently-filed putative class actions challenging the cost of supplemental benefits. As we discussed in a prior alert, the plaintiffs in these cases have argued that an employer’s inclusion of a voluntary benefit on its Form 5500 is an admission that the benefit is subject to ERISA. The footnote pushes back on that theory directly, stating that such reporting “does not, by that act alone, stamp [the employer’s] approval on the voluntary benefit arrangement such that the arrangement necessarily is an ERISA-covered plan” and is “a relevant but not dispositive fact in the view of the Department.”
The DOL further clarified that imposing tax-required terms does not change this conclusion unless the employer or trustee restricts the employee’s ability to move funds to a rollover Trump Account beyond the restrictions imposed by the Code.
GROOM INSIGHT: This position is similar to the position that the DOL took regarding HSAs and IRAs. The DOL’s requirements for ERISA exemption closely track the five factors the Department articulated for HSAs in FABs 2004-01 and 2006-02 and DOL’s IRA payroll-deduction safe harbor at 29 C.F.R. § 2510.3-2(d). As with HSAs, the DOL took a flexible approach by concluding that employer contributions are not determinative of the accounts’ ERISA status, given the structure and purpose of Trump Accounts.
2. Employee After-Tax Contributions Not Through an Employer Contribution Program
An employer may also choose to facilitate the remittance of after-tax payroll deduction contributions by employees to fund their own Trump Accounts through after-tax payroll deductions, outside an Employer Contribution Program. The only way an employee can contribute to a Trump Account through the workplace after the growth period ends is through such program. The Tech Release provides that the payroll deduction IRA safe harbor is available to cover these arrangements subject to satisfying the safe harbor conditions. Importantly, the DOL confirmed that eligibility for the safe harbor is not forfeited simply because the safe harbor conditions were not previously met for employer contributions made during the growth period.
GROOM INSIGHT: These structures are similar to payroll deduction IRA arrangements, which represents another avenue for employee savings. Also, some contributions may need to be after-tax to satisfy the nondiscrimination test applicable to Employer Contribution Programs.
The DOL highlighted the importance of employer neutrality in this context, explaining that the absence of employer involvement is fundamental to the safe harbor’s rationale for excluding Trump Accounts from ERISA treatment. An employer that merely facilitates the program’s availability without controlling it or making it appear to be part of the company’s own benefit package does not violate the safe harbor’s neutrality requirement. Drawing on Interpretive Bulletin 99-1, the DOL provides several examples of activities that employers may undertake while maintaining neutrality, including:
- providing general program information to employees, including posting employer-provided Trump Account information on the employer’s intranet site;
- providing general information and educational materials on the advantages of retirement saving and of contributing to a Trump Account; and
- linking to the government’s official Trump Account website.
In all cases, the employer must avoid putting its “stamp of approval” on any product or provider.
GROOM INSIGHT: The HSA rules are generally more permissive than these Trump Account and IRA rules when it comes to employer neutrality. An employer may limit which HSA providers may market their products in the workplace and may route contributions to a single HSA trustee/custodian, without converting the arrangement into an ERISA-covered plan. Employers are more constrained here: they can narrow the field of providers, but they must remain neutral and cannot recommend or vouch for any particular product or provider.
Prohibited Transaction Rules Continue to Apply
Treasury has advised the DOL that, because a Trump Account is a type of IRA, the disqualification rule under Code section 408(e)(2) applies. As a result, if the accountholder or beneficiary engages in a transaction prohibited under Code section 4975 with respect to the Trump Account, the account could lose its tax-favored status – regardless of whether the arrangement is subject to ERISA.
GROOM INSIGHT: Like HSAs and IRAs, Trump Accounts remain subject to the Code section 4975 prohibited transaction rules even though they are generally not ERISA plans. While the Tech Release did not elaborate on these implications, it seems that employers that fail to promptly transmit participants’ Trump Account contributions may violate the prohibited transaction provisions of Code section 4975. In addition, because Trump Accounts are traditional IRAs, they may inherit use of the DOL’s prohibited transaction exemptions for IRAs (e.g., PTE 97-11, PTE 93-33, and PTE 93-1) – relief the DOL expressly withheld from HSAs in FAB 2006-02. However, the DOL might not extend this relief, as the kinds of investments allowed in Trump Accounts are much more restricted.
Bottom Line
Because the guidance addresses ERISA status only, employers and providers should continue to monitor for additional Treasury and IRS, guidance on the operational, tax, and administrative mechanics of Trump Accounts. Groom attorneys are closely following these developments and are available to assist with designing compliant Trump Account contribution programs.
[1] 29 C.F.R. § 2510.3-2(d).
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