Fifty-five million women benefited from the Obama-era rule, which made companies provide free birth control.
Before taking office, Mr Trump had pledged to eliminate that requirement.
The mandate requiring birth control coverage had been a key feature of so-called Obamacare - President Obama's efforts to overhaul the US healthcare system.
But the requirement included a provision that permitted religious institutions to forgo birth control coverage for their employees.
The Department of Health and Human Services (HHS) said on Friday it was important to expand which organisations can opt out and deny free contraceptive coverage.
"We should have space for organisations to live out their religious ideas and not face discrimination because of their religious ideas," said one HHS official, who did not wish to be named.
Speaker of the House Paul Ryan, the top Republican in Congress, praised the decision as "a landmark day for religious liberty".
The American Civil Liberties Union (ACLU) and the National National Women's Law Center have announced that they will sue the federal government over the decision.
Why was the decision made?
In announcing the rule change, HHS officials cited a study claiming that access to contraception encourages "risky sexual behaviour".
Roger Severino, the director of the HHS Office of Civil Rights, argued that only a small percentage of employers will choose to opt out, and therefore only a limited number of women will be affected.
But many health policy analysts say employers that do not wish to pay for their employees' contraceptive coverage will now be able to.
Diedra Penner, 33, from Bellingham, Washington state, told the BBC she feared losing access to the birth control she uses to treat polycystic ovarian syndrome. At the moment, the treatment is paid for with partial subsidies through the Affordable Care Act.
"Without the birth control mandate I don't know how much the treatment would cost," she said.
"This is definitely an attack on women - if this issue affected men it wouldn't be happening this way."
The department disputes reports that millions of women may lose their birth control coverage if they are unable to pay for it themselves.