The charge is that the contests of the hard drive are illegal. That's not just "evidence", that's the entire crux of the case. The question at hand is, "are the contents of this drive illegal?" If the prosecution can't prove that it is, that's their tough luck. If they can't view the contents of the drive then what the hell business do they have prosecuting this guy? Their inability to break encryptioon isn't the defendent's fault or problem. The state wants to prove that the guy did something wrong? Okay, let's see the proof. You have the guy's laptop, let's see why you think he's doing something illegal.
The prosecution could move forward with the case without the decrypted documents, presenting the sworn testimony of the ICE agent, but they're within their rights not to. They've decided that they need to examine the contents of the drive, shown probable cause to a judge (based on the testimony of the ICE agent), and gotten a warrant. The judge compelled the defendant to supply the documents pursuant to the warrant. He's not complying, therefore he's in contempt of a court order.
The defendant could easily claim to have forgotten the password, and the case would move forward without the evidence (although that's clearly not the prosecution's preferred outcome), but the judge would then instruct the jury about the defendant's claim, and let them weigh that against the ICE agent's sworn testimony. That doesn't look like a good option for the defense, so they're trying this first.
In any case, the 5th amendment doesn't protect defendants from handing over incriminating evidence, only from making self-incriminating statements to the government.
As many others pointed out, had the defendant not shown the documents to the ICE officer, the prosecution would not have probable cause to search the drive, a warrant would not have been issue, and we'd all be wasting our time discussing something else on slashdot right now.