Impact of the “One Big Beautiful Bill Act” on Employee Benefits

On July 4^th, President Trump signed new legislation known as the “One Big Beautiful Bill” (the “Act”). The Act affects employee benefit plan in multiple ways, including several changes to health savings account rules and impacts to fringe benefits.

This article summarizes some of the key provisions of the Act that directly impact employee benefits, but a number of provisions also impact employers more broadly.  We are hosting a Webinar – as part of our Labor and Employment Law Webinar Series – on July 31, where we will discuss these provisions in more detail, as well as the broader employment-related sections of the Act.  For more information about the Webinar and to register, click here.

Executive Compensation for Tax-Exempt Organizations

Tax-exempt organizations are subject to a 21% excise tax on remuneration paid to “covered employees” in excess of $1 million under Code Section 4960.  Currently, “covered employee” means any employee who is one of the five highest compensated employees of the organization in a tax year, or who was a covered employee in any prior tax year beginning in 2017.  (In other words, once a covered employee, always a covered employee.)  But effective January 1, 2026, the Act amends the definition of “covered employee” to include any employee or former employee – not just the top five highest compensated – who is paid remuneration in excess of $1 million, expanding the potential reach of the excise tax for nonprofit organizations.

HSA Impacts

Telehealth & HSA Eligibility: To be eligible to make contributions to a health savings account (“HSA”), an individual must be covered under a high deductible health plan (“HDHP”) and generally must not be eligible for any other group health that would provide cost-free coverage before the individual has met their deductible (known as “first-dollar coverage”). The CARES Act of 2020 (the “CARES Act”), however, permitted HDHPs to apply first-dollar coverage to telehealth services without jeopardizing a participant’s ability to contribute to an HSA on a tax-free basis. This provision of the CARES Act expired on December 31, 2024; the Act has made permanent this first-dollar coverage exception for telehealth services. Importantly, this change applies retroactively back to January 1, 2025.  This means that if a plan was previously amended to eliminate first-dollar coverage of telehealth services as of January 1, 2025, the plan may again be amended to reinstate such coverage.  Additionally, if a plan has been covering telehealth services on a first-dollar coverage basis in 2025, the plan will not be considered out of compliance with the HSA first-dollar coverage rules.

Direct Primary Care: First-dollar coverage of direct primary care services no longer disqualifies individuals from HSA eligibility. For this purpose, “primary care” is defined as “general anesthesia, prescription drugs, and non-ambulatory lab services.” The coverage must not exceed $150 per month for individuals and $300 per month for families, adjusted annually for inflation.

HSA-Compatible Plans: Beginning January 1, 2026, individuals who are enrolled in Bronze or Catastrophic plans under the Affordable Care Act will be eligible to contribute to an HSA.  Prior to this change, these plans were specifically excluded from HSA compatibility.

Dependent Care Assistance Programs (DCAPs)

Under a DCAP, a participant may contribute, on a pre-tax basis, up to the maximum amount allowed by law to pay for dependent care expenses that are necessary in order to allow the participant to work. Prior to the Act, participants were eligible to contribute up to $2,500 per year for single individuals and $5,000 per year for married individuals.  Beginning January 1, 2026, the Act increases these annual limits to $3,750 and $7,500, respectively. Notably, this is the first increase in DCAP limits since the Program was signed into law in 1986.

Fringe Benefits

Employer-Provided Meals: The Tax Cuts and Jobs Act of 2017 (“TCJA”) limited the employer deduction for food and beverages provided to employees at the workplace to 50% of the cost, and eliminated the deduction entirely after 2025.  The Act affirms the removal of this employer deduction, with a few minor exceptions for employers providing meals on certain fishing vessels, particularly those in remote areas (like Alaska).

Moving Expenses: The Act permanently eliminates the ability for employers to provide employees tax-free moving expense reimbursements. The tax-free treatment of these reimbursements was only temporarily suspended under the TCJA through 2025.  Active duty military are still allowed this deduction when moving due to military orders.

Qualified Transportation Benefits: The Act permanently removes the deduction for qualified transportation fringe benefits, including free parking, transit passes, and parking reimbursements, but retains the employer deduction for tax-free qualified bicycle commuting benefits.  However, bicycle reimbursements for employees are still not excludable from their income.

Educational Assistance: The Act makes permanent tax-free reimbursements of student loan repayments under a qualified educational assistance plan established pursuant to Code Section 127. The income tax exclusion for reimbursements of student loan repayments was previously set to expire on December 31, 2025. Qualified educational assistance plans may reimburse up to $5,250 of student loan repayments and tuition expenses per employee, per year.  The Act also permits, for the first time since qualified educational assistance programs were created by law in 1979, the IRS to adjust the $5,250 limit for inflation and cost-of-living increases, starting in 2026.

Tax Credits

Child Care Tax Credit: Employers may receive a tax credit for child care they provide to their employees. The Act increases the credit rate for employer-provided child care from 25% to 40% of employer expenses. The annual credit maximum is expanded from $150,000 to $500,000. For small businesses, the credit rate is 50%, and the maximum amount is $600,000. This increase begins in 2026 and is inflation-adjusted.

Employee Retention Tax Credit (“ERTC”): The CARES Act incentivized employers during the COVID-19 pandemic to retain employees through an employment tax credit based on retention, but the program quickly became rife with fraud by “ERTC promoters” who helped employers claim the credits but charged exorbitant fees.  (For more information about the ERTC, view our article here.) The Act introduces penalties for promoters who failed to meet the due diligence requirements when claiming the credits on behalf of employers. The Act also extended the statute of limitations for assessing these penalties from three to six years. Finally, the Act disallows the IRS from making credits or refunds for Q3 or Q4 of 2021 for ERTC claims made after January 31, 2024.

FMLA: The TCJA allowed employers who pay at least 50% of an employee’s wages while on FMLA leave to claim a tax credit for the wages; however, this credit was set to expire on December 31, 2025. The Act makes the FMLA credit permanent. It also provides for an alternate credit calculation based on a percentage of the insurance premium companies may pay for FMLA coverage. This percentage of the premiums paid does not account for actual wages paid to employees, so employers would be wise to explore both options in order to maximize the credit.

“Trump Accounts”

The Act establishes new investment account opportunities for U.S. citizens who are under age 18 and who have a social security number.  Colloquially known as “Trump Accounts,” these investment accounts will permit parents (as well as other “tax-paying entities”) to make annual, after-tax contributions of up to $5,000 (adjusted annually for inflation beginning in 2027) to an investment account established for a child until the child turns 18.  Additionally, the federal government will make an initial $1,000 deposit for all qualifying children born between January 1, 2025, and December 21, 2028.  Individuals can only make withdrawals from their Trump Account once they have attained the age of 18, at which point all withdrawals are subject to IRA rules. This means that unless an exception applies (for example, if the withdrawal is used for qualifying educational expenses or the first-time purchase of a new home), any withdrawal before the age of 59 ½ will be subject to a 10% penalty.

Of particular note to employers is that the Act permits an employer to make up to $2,500 (adjusted annually for inflation beginning in 2027) in tax-free contributions to an employee’s account or to the account of an employee’s dependent.  An employer contribution will count toward the $5,000 annual limit.  Employer contributions will be subject to certain requirements, including the existence of a written plan document, nondiscrimination requirements, and provision of certain notices to eligible employees (much like a qualified education or tuition reimbursement plan).

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Overall, most of the changes under the Act do not take effect until the start of 2026. Health savings accounts will become more flexible on coverage. Many provisions of the TCJA related to fringe benefits will be made permanent. Tax-exempt organizations may be exposed to additional excise taxes for their highly-paid individuals. There is quite the mixed bag of good and bad news, but the implementation of inflation adjustments and delayed enactments allow employers and employees alike to prepare and plan for these future changes.