By ESOPs, Benefits & Compensation

As cooler fall weather descends upon us, the EB&C Practice Group at Kaufman & Canoles would like to take this opportunity to catch you up on a few hot topics in the employee benefits space. As always, if you have questions about these (or any other) topics, please feel free to reach out to a member of our team.
 
New ACA Affordability Percentage and Penalties for 2026
 
The IRS has released the ACA’s annual affordability threshold for 2026, clocking in at 9.96%, which is the highest rate to date under the ACA. The threshold means employees cannot be made to spend more than 9.96% of their household income on the lowest-cost self-only coverage offered by their employer. Because most employers don’t know their employees’ total household income, the IRS allows three safe harbors that will ensure employers meet this obligation. Many use the federal poverty level (or “FPL”) safe harbor to be sure they meet the affordability standard, as the FPL is a published figure that involves a simple one-time calculation for the year. Using that rule, for 2026, the most an employee can be made to pay each month for the lowest-cost self-only coverage is $129.89 (an increase from $113.20 in 2025). While other safe harbors may let employers charge higher rates, they involve comparing the premiums to the employee’s actual pay, so can result in less certainty.
 
Unfortunately, along with the affordability threshold increase, penalties under the ACA are heading up as well. The “A” penalty, which is imposed when employers don’t offer coverage to enough full-time employees, will rise to $3,340 annually per employee. The “B” penalty, which is imposed when the coverage offered is unaffordable, will go up to $5,010 annually per employee.
 
IRS Issues Final Regulations on Roth Catch-Up Contributions
 
After a several-year wait, and despite many hoping for another reprieve, the final Roth catch-up rules are upon us. Starting in 2026, as we have outlined previously, certain highly paid employees will no longer be able to make pre-tax catch-up contributions into 401(k) plans (and certain other similar plans). Instead, this class of employees will be required to make post-tax Roth catch-up contributions (or make no catch-up contributions). The recently released final regulations largely follow the proposed regulations, so there are no major changes or surprises that would disrupt the implementation process at this point.
 
As a reminder, the new rule applies to employees who earned over $145,000 in FICA wages (the figure reported in box 3 of the employee’s W-2) from the same employer in the prior year. The wage threshold will increase annually along with other plan limits. So, for example, an employee who earned $175,000 in 2025 and works for the same employer in 2026 will not be permitted to make pre-tax catch-up contributions in 2026. Any catch-up contributions must be made by way of post-tax Roth contributions.
 
This will require separately tracking another category of employees to ensure catch-up contributions are limited for this group. Employers who have not already coordinated with their plan recordkeepers should do so as soon as possible to implement by year-end.
 
Newly Confirmed EBSA Head Raises Hopes for ESOP Community 
 
The ESOP industry received a boost recently when Dan Aronowitz was confirmed to lead the DOL’s Employee Benefits Security Administration (or EBSA), the DOL’s division that enforces ERISA. Stakeholders in the ESOP community have been vocal about EBSA’s seemingly antagonistic view toward ESOPs, evidenced by drawn-out investigations, undisclosed information-sharing with class-action plaintiffs’ lawyers, and, in Aronowitz’s own words, “bias against ESOPs.” Additionally, the DOL intends to reintroduce a proposed “adequate consideration” framework—one was briefly proposed in the last days of the Biden administration and withdrawn by the second Trump administration—that would govern valuation standards in ESOP transactions, which have resulted in dozens of class-action lawsuits involving ESOP trustees, valuation firms, company management, and sellers in ESOP transactions.
 
Despite a potentially softer approach from the government, private plaintiffs’ firms show few signs of slowing their pursuit of ESOPs, expanding beyond ESOP transactions and into more routine ESOP administrative functions like the amount of cash an ESOP holds without investing and re-leveraging transactions. Clear final rules from the DOL on some of these topics—particularly valuation standards—would be welcome relief to many in the community.
 
Adding Private Assets to 401(k) Plans Gathers Momentum
 
The landscape for private assets in defined contributions plans (like 401(k) and 403(b) plans) continues to shift, picking up speed in the last few months. So-called “private” assets—investments in asset classes like private equity, real estate, infrastructure, etc. that are not directly publicly traded securities or other widely available investments like mutual funds—have long been open to large defined benefit plan investment managers. But several challenges have left them out of defined contribution plans for the most part. By their nature, private assets are less liquid, more complex, carry higher fees, and pose more regulatory and litigation concerns than publicly available securities and mutual funds. Generally, private investments like debt and real estate would not be made directly available to plan participants but instead would be included as part of a larger investment fund that would likely also hold publicly traded securities and other more liquid investments.
 
Over the last five years, the DOL’s position on many of these topics has shifted with the presidency. Under the first Trump administration, the DOL issued informal guidance stating that some private equity investment in 401(k) plans may be appropriate; the Biden administration later supplemented that guidance to clarify that the original guidance was not intended to promote private equity. Cryptocurrencies and other digital assets have seen movement too—the Biden-era DOL issued informal guidance strongly cautioning plan fiduciaries before making digital assets available for investment; the second Trump administration recently rescinded that guidance.  

Now, the Trump administration has issued an executive order directing the DOL (and other federal agencies) to review ways to make private asset investments more widely available to defined contribution plan participants, including by considering ERISA fiduciaries’ obligations, potential safe harbors, how to reduce litigation, and whether to revoke the Biden-era supplement stating that the DOL does not intend to promote or favor private equity investments. While any new rules will not require plan fiduciaries to add these assets classes, they could broaden the scope of investments available to employees while minimizing the current risks of doing so. 

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2025.