Illinois Updates Unemployment Insurance Treatment of 401(k) Contributions

Effective July 1, 2026, the Illinois Department of Employment Security (IDES) will implement a change to how certain 401(k) contributions are treated for unemployment insurance purposes. This update reflects a revision to the Illinois Administrative Code and aligns state treatment with current IRS guidance to create greater consistency between federal and state reporting.

Beginning July 1, 2026:

• Employer contributions to employee 401(k) plans will no longer be considered “wages” for unemployment insurance reporting.
• Employer contributions made prior to July 1, 2026, should still be reported as wages.
• Employee contributions to 401(k) plans will continue to be treated as wages.

This change applies only to employer contributions to 401(k) plans and does not extend to other types of benefit plans.

What This Means for Employers

This change primarily impacts payroll reporting and unemployment tax calculations.

The maximum taxable wage base for unemployment tax in Illinois for 2026 is $14,250 per employee.  The taxable wage base is adjusted annually based on the state’s unemployment fund balance and employment levels.

Key considerations:

• Employer 401(k) contributions made on or after July 1, 2026, must be excluded from wages reported to IDES.
• Payroll systems and reporting processes should be reviewed and updated to reflect this change.
• Failure to update systems may result in overreporting wages and potentially overpaying unemployment taxes.

Employers should coordinate with their payroll providers or internal teams to ensure compliance beginning in the third quarter of 2026.

What This Means for Employees

While this change does not affect day-to-day compensation, it may have a small impact in specific situations.

Here’s what to know:

• This update does not change your take-home pay or retirement savings.
• If you file for unemployment benefits in the future, the wages used to calculate your benefit may be slightly lower, since employer 401(k) contributions will no longer be included.
• Your own 401(k) contributions will still count toward wage calculations.

If you have questions about how this change may impact your organization or workforce, please contact your FGMK advisor.