Illinois regulations change tax treatment of employer 401(k) contributions for SUI purposes

The Illinois Division of Employment Safety has amended state unemployment insurance coverage (SUI) regulation 56 Ill. Adm. Code 2730.155, which, efficient with wage funds made after June 30, 2026, excludes from SUI taxable wages employer contributions below a 401(ok) retirement plan. Previous to this modification, each worker pretax and employer 401(ok) contributions have been included in SUI taxable wages.

The amended regulations present the next examples:

Worker 401(ok) pretax contributions. A person is entitled to wage of $1,000. It’s agreed between the employer and the person who $50 of the person’s wage is to be positioned within the employer’s 401(ok) plan fund, and the person is paid money of $950. The 401(ok) plan doesn’t present employer contributions. The person’s wages below Illinois regulation Part 234 are $1,000.

Employer 401(ok) contributions. A person is entitled to wage of $1,000. It’s agreed between the employer and the person who $50 is to be positioned within the employer’s 401(ok) plan fund, and the person is paid money of $950. As well as, the employer contributes $50 to the fund on behalf of the person. For funds made earlier than July 1, 2026, the person’s “wages” below Illinois regulation Part 234 are $1,050. Nevertheless, for funds made after June 30, 2026, the person’s SUI taxable wages are $1,000 as a result of the employer’s $50 contribution is just not included in SUI taxable wages efficient July 1, 2026.

With this modification, and efficient July 1, 2026, Illinois regulation now conforms to the Federal Unemployment Insurance coverage Contributions Act (FUTA) pursuant to the unemployment insurance coverage tax treatment of 401(ok) contributions below IRC Part 3306(b). (IRS Form 940 instructions, p. 9.)

Ernst & Younger LLP insights

Payroll system tax configurations needs to be reviewed to substantiate that, for Illinois SUI purposes, worker 401(ok) deferrals are correctly distinguished from employer contributions when calculating taxable wages.

This growth highlights {that a} state could undertake a singular definition of SUI taxable wages that doesn’t conform to federal or to its personal definition for wages topic to earnings tax and earnings tax withholding. Employers ought to validate state-specific SUI wage tax configurations guidelines slightly than defaulting to federal logic or a uniform multi-state method.