The Illinois Department of Employment Security has amended state unemployment insurance (SUI) regulation 56 Ill. Adm. Code 2730.155, which, effective with wage payments made after June 30, 2026, excludes from SUI taxable wages employer contributions under a 401(k) retirement plan. Prior to this amendment, both employee pretax and employer 401(k) contributions were included in SUI taxable wages.

The amended regulations provide the following examples:

Employee 401(k) pretax contributions. An individual is entitled to salary of $1,000. It is agreed between the employer and the individual that $50 of the individual's salary is to be placed in the employer's 401(k) plan fund, and the individual is paid cash of $950. The 401(k) plan does not provide employer contributions. The individual's wages under Illinois law Section 234 are $1,000.

Employer 401(k) contributions. An individual is entitled to salary of $1,000. It is agreed between the employer and the individual that $50 is to be placed in the employer's 401(k) plan fund, and the individual is paid cash of $950. In addition, the employer contributes $50 to the fund on behalf of the individual. For payments made before July 1, 2026, the individual's "wages" under Illinois law Section 234 are $1,050. However, for payments made after June 30, 2026, the individual's SUI taxable wages are $1,000 because the employer's $50 contribution is not included in SUI taxable wages effective July 1, 2026.

With this amendment, and effective July 1, 2026, Illinois law now conforms to the Federal Unemployment Insurance Contributions Act (FUTA) pursuant to the unemployment insurance tax treatment of 401(k) contributions under IRC Section 3306(b). (IRS Form 940 instructions, p. 9.)

Ernst & Young LLP insights

Payroll system tax configurations should be reviewed to confirm that, for Illinois SUI purposes, employee 401(k) deferrals are properly distinguished from employer contributions when calculating taxable wages.

This development highlights that a state may adopt a unique definition of SUI taxable wages that does not conform to federal or to its own definition for wages subject to income tax and income tax withholding. Employers should validate state-specific SUI wage tax configurations rules rather than defaulting to federal logic or a uniform multi-state approach.