Happy Spring from the Kaufman & Canoles ESOPs, Benefits & Compensation team! We hope you’re ready for sunshine, warm weather, and another round of benefits updates. Please find a few of our thoughts below and, as always, feel free to contact a member of our team with any questions.
IRS Revises Special Tax Notices for Plan Distributions
In January, the IRS released updated notice language that plan administrators may use to notify participants of the tax impact of eligible rollover distributions. The new templates replace previously released versions, taking into account changes from SECURE 2.0 and implementing guidance from the U.S. Government Accountability Office.
As a brief reminder, Section 402(f) of the Code requires the plan administrator of qualified plans to give certain notices to any recipient of an eligible rollover distribution within a reasonable amount of time before the distribution is made. The IRS released new templates for (1) distributions from a Roth account and (2) all other eligible rollover distributions.
Under the new guidance, notices should reflect the following changes:
- Notices should include the following new exceptions from the 10% additional tax on distributions before age 59 ½:
- distributions for emergency personal expenses,
- distributions to domestic abuse victims,
- distributions to terminally ill individuals,
- qualified disaster recovery distributions,
- certain distributions to public safety employees and private sector firefighters
- distributions from Pension-Linked Emergency Savings Accounts, and
- qualified long-term care distributions.
- References to the required minimum distribution age should reflect the age increase to 73 and future increase to 75. In the sample notice provided by the IRS, the form opts to leave out age-specific language entirely.
- Notices may replace the former $5,000 threshold for distributing a lump-sum distribution to participants without consent with the increased $7,000 threshold implemented under SECURE 2.0 if desired. Plan administrators have discretion in whether to increase the threshold.
Plan administrators may customize the notices by omitting sections not relevant to a given participant. As a reminder, plan administrators are not required to utilize the safe harbors but may do so if they choose. The new template notices are available here.
Proposed Trump Account Rules for Employers
The IRS also released proposed rules for newly available Trump Accounts, in part refining the ways that employers can contribute to them. Trump Accounts are tax-advantaged savings accounts for children, created under the One Big Beautiful Bill Act of 2025. These accounts enable eligible minors to open a traditional individual retirement account managed on their behalf until they reach the age of 18. Contributions to these accounts are expected to begin as early as this July.
Under the proposed rules, employer contributions paid to a Trump Account, referred to as section 128 contributions, must be made pursuant to a section 128(c) Trump Account contribution program, which is a separate written employer plan to contribute to Trump Accounts of employees or dependents of employees. Employer contributions paid to the account of an employee or a dependent of an employee are not includible in the employee’s income and are capped at $2,500. Section 128 employer contributions do, however, count towards the $5,000 annual contribution limit for Trump Accounts.
Employers may decide whether or not to contribute to Trump Accounts. The proposed regulations note that more detailed regulations outlining employer contributions are expected to be released at a future date.
Voluntary Benefits Class Action Lawsuit Wave
In December of last year, Schlichter Bogard—the law firm behind many 401(k) fee lawsuits—filed a wave of class action complaints against large employers and benefits consulting firms alleging that employees paid excessive commissions and premiums for voluntary insurance benefits. By way of background, voluntary benefits, such as accident insurance or cancer insurance, are typically excluded from ERISA under a safe harbor. The requirements for exclusion are: (1) that the employer does not make any contributions to the program, (2) that participation in the program is completely voluntary for employees or members, (3) that the employer only permits the insurer to facilitate the program without intervening to endorse it, and that (4) the employer receives no benefit in connection with the program other than reasonable compensation.
In one filed case, the employees argue that the employer endorsed a voluntary benefits program by exercising discretionary authority over the administration and management of the plan and receiving improper benefits linked to excessive commissions from the programs.
Although too soon to be called a trend, employers should exercise caution when offering voluntary benefits. The safe harbor provision outlining the requirements for exclusion from ERISA does not define the term “endorse” or “reasonable compensation.” In the past, courts have found reasonable compensation to mean amounting to administrative expenses or other related fees in connection with the benefit. Courts have interpreted whether employer action qualifies as “endorsement” by assessing how a reasonable employee would interpret the employers' motives in connection with the benefit. But the lines here are gray and subjecting these types of benefits to class-action ERISA lawsuits could be time-consuming and expensive.
The proceedings for these lawsuits are ongoing. Employers should work with counsel to verify if they are using best practices in facilitating voluntary benefit offerings.
DOL Newly Warming to ESOPs
This past January, the Department of Labor’s Employee Benefits Security Administration removed Employee Stock Ownership Plans from its list of enforcement priorities for employee benefits. The enforcement framework identifies areas of concern for misconduct to concentrate department energy. The removal of ESOPs from the list marks a major shift in the Department’s treatment of ESOPs. In years past, the DOL has aggressively scrutinized ESOPs, challenging stock valuations and subjecting them to a high volume of audits. Removing ESOPs from the list of targeted areas of enforcement will hopefully mitigate the chilling effect that the Department’s stance on ESOPs has inflicted in the past.
Relatedly, the Department of Labor’s Employee Ownership Initiative Report for 2026 expressed support for ESOPs as a useful tool to enable workers to share in their companies' profits and foster a more collaborative workspace. The report was released in connection with the Worker Ownership, Readiness, and Knowledge provisions of SECURE 2.0. The report also expresses the DOL’s future intent to educate employers about the benefits of employee ownership vehicles like ESOPs and illustrates the opportunity for asset growth that ESOP plans can provide.
EBSA has also recently used amicus, “friend of the court,” briefs to vocalize its support for plan sponsors in private class-action ERISA litigation. Although they were not ESOP cases, the Administration filed four amicus briefs in circuit courts of appeal in the month of January alone in support of employers and plan sponsors. In the past, EBSA has largely used these briefs to support plaintiffs, encouraging lower pleading standards and widely interpreting fiduciary duties. Presently, though, EBSA is siding with employers more often—for example, arguing for the dismissal of claims challenging how employers reallocated forfeitures in retirement plans, where EBSA argued that using forfeited contributions to reduce future employer obligations instead of paying plan expenses does not automatically violate ERISA fiduciary duties.
Taken together, these shifts mark a new era where the Department as a whole is increasingly supportive of plan sponsors and fiduciaries generally, and ESOPs specifically.
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 2026.
