New nondiscrimination rules for Trump Account Programs and DCAPs

The IRS recently issued Trump Account nondiscrimination proposed regulations that spell out how employers must run nondiscrimination testing for both Trump Account Contribution Programs (new under Section 128) and Dependent Care Assistance Programs (DCAPs) (Section 129). Here's what you need to know.

The testing rules are nearly identical

Both Trump Account programs and DCAPs must pass the same three core tests:

1. Same-terms test — Benefits must be offered on the same terms to all eligible employees. It is OK if employees end up with different dollar amounts based on their own choices.
2. Eligibility test — The group of employees you cover must be based on legitimate business reasons (e.g., job type, location, full-time vs. part-time) and cannot favor higher-paid employees. A numerical safe harbor is now available: you pass if the percentage of non-highly-compensated employees (NHCEs) eligible is at least roughly 90% of the percentage of highly compensated employees (HCEs) eligible.
3. 55% average benefits test — The average benefit received by NHCEs must be at least 55% of the average benefit received by HCEs.

One difference: DCAPs must also pass an owner concentration test (no more than 25% of total benefits can go to >5% owners and their families). Trump Account programs do not have this test.

Planning tip: The DCAP average benefits test is now easier to pass

The biggest takeaway for DCAP sponsors is how the IRS says to calculate the "average" in the 55% test. Under the proposed rules:

• Only employees who actually receive benefits count. If an employee is eligible but does not sign up, that employee is not included in the calculation. This is a big deal, as previously it was unclear whether all eligible employees should be counted, which would drag down the NHCE average when fewer NHCEs participate.
• Employees earning under $25,000 can be excluded from the average benefits test when benefits are provided through salary reduction.
• Employees under age 21 with less than one year of service can also be excluded.
• Collectively bargained employees not in the program can be excluded.

Quick example: You have 15 HCEs and 15 NHCEs, all eligible. Eleven HCEs elect $7,500 and four NHCEs elect $7,500. The average for each group is $7,500 — you pass at 100% even though 11 NHCEs elected nothing. Those non-participants simply drop out of the math.

What you should do now

• Re-run your DCAP testing. If you have been close to failing or have failed the 55% test in the past, try recalculating using only employees who actually elected benefits. Your results may be significantly better.
• Layer your exclusions. Combine the non-participant exclusion with the under- $25,000 exclusion and the under-age-21/under-one-year exclusion. Together, these can shrink the testing group and improve your ratio.
• Consider broadening eligibility. If you have been limiting who can participate in your DCAP to manage testing risk, the more favorable math may allow you to open the plan to more employees.
• Know the fix if you fail. Both programs now have a correction option: include the excess amounts in HCE income and report them on Form W-2 by the W-2 deadline. This avoids disqualifying the entire program.
• You can rely on these rules now. The IRS says employers may follow the proposed regulations for plan years beginning before final regulations are published.

Here's a summary of other key similarities and differences between the two types of programs covered under the proposed regulations:

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These new rules make testing clearer and, for DCAPs especially, potentially easier. If your DCAP has struggled with the 55% test, now is the time to revisit your numbers. Please contact a member of your TrueNorth team for more information.

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For informational purposes only — not legal or tax advice. Contact your benefits counsel for guidance specific to your plans.