Benefits And Compensation Impacts Of The 'One Big Beautiful Bill Act'

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (the "BBB" or the "Act") into law, which enacts sweeping changes to numerous areas of U.S. federal income tax law (the text of the Act can be found here). This Alert summarizes the changes made by the BBB that impact employer-provided employee benefits and compensation, including several that extend and/or modify certain material tax provisions enacted in the Tax Cuts and Jobs Act of 2017 (the "TCJA").

Public Company Compensation

Expansion of Deduction Limit Applicable to Executive Compensation - The final BBB modified Code Section 162(m) to aggregate controlled group members when determining the disallowance of compensation expense of "covered employees." Under current law, Code Section 162(m) generally prohibits any publicly-held corporation from deducting compensation (including performance and equity based compensation) that exceeds $1 million paid to certain officers and highly compensated employees of the public company during the tax year. This rule applies to the deductibility of the annual compensation paid to the public company's "covered employees," which are defined as its: (i) CEO and CFO, (ii) employees whose compensation must be reported to shareholders as the top three (3) paid employees other than the CEO and CFO, (iii) the top 5 paid employees of the Company not counting the employees in (i) or (ii), and (iv) any employee who was a covered employee in the prior year.

Under the final BBB, beginning with tax years after December 31, 2025, if a public company is a member of a controlled group of companies, then it will need to include all members of the controlled group when determining the top 5 paid employees of the company to include as covered employees (the broader group, defined in the BBB as the "specified covered employees"). The new rule also requires public companies to use the compensation paid to the specified covered employee by other controlled group members to determine the amount of compensation that will be disallowed as a compensation expense. The "allocable limitation amount" for a specified covered employee with respect to any member of the controlled group means the amount which bears the same ratio to $1,000,000 as (i) the amount the compensation paid by such controlled group member to the specified covered employee bears to (ii) the aggregate amount of compensation provided by all controlled group members to the specified covered employee. Under the new rule, the controlled group will essentially allocate the $1,000,000 deduction limit among the controlled group members in proportion to how much each company paid the employee. If the employee is only receiving compensation from one controlled group member, then that member is allocated the full allocable limitation amount of $1,000,000.

Example: Assume a three-member controlled group, with each paying the specified covered employee the following amounts of remuneration:

Company 1: $200,000
Company 2: $50,000
Company 3: $50,000

Total remuneration = $200,000 + $50,000 + $50,000 = $300,000

Company 1 is allocated $200,000/$300,000, or 2/3rds, of the deduction limit set by Code Section 162(m) ($666,666), and Companies 2 and 3 are each allocated $50,000/$300,000, or 1/6th, of the total allowable deduction ($166,666 each).

Employee Leave

Continuation of Employer Credit for Paid Family and Medical Leave – The BBB makes temporary employer tax credits for paid family and medical leave under Code Section 45S permanent with a few changes. The TCJA provided an employer tax credit designed to encourage employers to offer paid family and medical leave to their employees. The tax credit began in January of 2018 and was set to expire at the end of 2025. Under the TCJA, employers can claim a credit equal to a percentage of wages they pay to qualifying employees while on family and medical leave. Qualifying employees are employees who have worked for the employer for at least one year and whose compensation does not exceed a certain threshold ($96,000 for 2026). Once the paid leave meets certain requirements (including a written policy), employers are entitled to a 12.5% tax credit on the amount of eligible wages, which increases by 0.25% for each percentage point by which the amount an employer paid a qualifying employee exceeds 50% of the employee's wages. The maximum credit that can be claimed is 25% (based on leave paid at 100% of normal wages).

The employer tax credit is now permanent, with the below modifications for taxable years beginning after December 31, 2025:

Under the TCJA, employers who were required by state or local law to provide paid family and medical leave could be disqualified from receiving the tax credit. The final BBB instead allows employers to receive the credit for leave provided in a state that does not mandate paid leave (even if the employers are required to provide paid leave in other states), as well as receive a credit for any paid leave provided in excess of that mandated by state or local law.
Eligible employers can claim the credit for a percentage of premiums paid for insurance policies that cover paid family and medical leave (not just wages paid during leave). This is an 'either/or' election – employers cannot claim both the credit for premiums and the credit for wages paid.
The employer can choose to shorten employee qualification for the paid family and medical leave to 6 months of employment (instead of requiring a full 12 months).

Health & Welfare

Health Savings Account Provisions - The final BBB does not include many of the health savings account (HSA) and health reimbursement account (HRA) provisions that were included in the original House bill (such as increasing the contribution limit, allowing both spouses to make catch-up contributions, and allowing Medicare-eligible taxpayers to contribute), but it does include a few important provisions related to HSAs:

Continued Telehealth Coverage under HSAs. During the COVID-19 pandemic, in an effort to promote remote access to health care, the Coronavirus Aid, Relief, and Economic Security (CARES) Act permitted coverage of telehealth services by HSA-compatible HDHPs before the participant meets his or her deductible. This relief, which was extended multiple times, expired on December 31, 2024. The final BBB retroactively codifies this safe harbor effective for plan years beginning after December 31, 2024, which ensures that HDHPs can cover telehealth services before the deductible is met without affecting a participant's HSA eligibility.
HSA Reimbursement for Direct Primary Care. Effective for months beginning after December 31, 2025, HSA owners will be allowed to spend up to $150 per month for individuals, and $300 per month for a family, to pay for direct primary care practice memberships. The type of care covered by a direct primary care practice membership is defined as consisting solely of primary care services provided by primary care practitioners for a fixed periodic fee. Certain services are specifically excluded from the definition of "primary care" services: (i) procedures that require general anesthesia, (ii) prescription drugs other than vaccines, and (iii) laboratory services not typically administered in an ambulatory primary care setting. The final BBB directs the Secretary of Health and Human Services to issue regulations or guidance regarding these direct primary care services reimbursements.
Allowance of Bronze and Silver HSA-Compatible Plans. One of the main HSA requirements is that an HSA can only be coupled with a high-deductible health plan (HDHP) that meets certain out-of-pocket spending limits. Under the final BBB, eligibility is expanded to include bronze and catastrophic plans. Effective for months beginning after December 31, 2025, HSAs will be deemed compatible with bronze-level coverage and catastrophic coverage available under the Affordable Care Act (ACA), even if the annual out-of-pocket spending limits exceed the limits permitted for HSA-compatible HDHPs.

Limited Eligibility for Premium Tax Credits – The final BBB modifies the eligibility rules for individuals to be eligible to receive premium tax credits under the ACA. Effective for tax years beginning after December 31, 2025, individuals with household income less than 100% of the federal poverty line who are ineligible for Medicaid due to their alien status are also not eligible for premium tax credits. Effective for tax years beginning after December 31, 2027, individuals who are aliens are not eligible for premium tax credits unless they qualify for certain specified 'resident' status or as specified refugees from Cuba or Haiti, and an individual's eligibility for premium tax credits must be verified by the exchange annually (automatic reenrollment is not permitted). Additionally, for tax years beginning after December 31, 2025, no premium tax credit is available for mid-year special enrollments due to changes in expected household income and individuals who receive advance payments of premium tax credits are liable for the full amount of any excess advance payments that they receive (the prior limitations are removed).
Increased Limits for Dependent Care Assistance Programs – Effective for tax years beginning after December 31, 2025, the final BBB increases the limit on pre-tax contributions that an employee may make to an employer-provided dependent care assistance program (DCAP) for individuals who are married filing jointly from $5,000 to $7,500, and for single or individuals who are married filing separately from $2,500 to $3,750.

Fringe Benefits

Continuation Tax Exclusion for Student Loan Discharges - Under current law, any income resulting from the discharge of student debt on account of death or total disability of the student is excludable from taxable income, but this treatment was set to expire after December 31, 2025. The final BBA makes permanent the exclusion from taxable income of any amount which is discharged after December 31, 2025 on account of death or total and permanent disability of the student, provided that the taxpayer includes his or her Social Security Number on the tax return for such taxable year.
Continuation of Employer-Provided Educational Assistance - Under current law, the first $5,250 of employer-provided educational assistance is excluded from an employee's gross income. Employer-provided educational assistance includes the payment, by an employer, of an employee's educational expenses (including, but not limited to, tuition, fees, and similar payments, books, supplies, and equipment). This also includes an employee's qualified student loan payments in the case of payments made before January 1, 2026. The final BBA makes this exclusion permanent. In addition, for employer-provided educational assistance payments made after December 31, 2025, the $5,250 maximum exclusion will be indexed for inflation (this limit had been fixed since 1979), so it may adjust from year to year.
No Tax Exclusion for Employer-Provided Meals - Under current law, food and beverage expenses of an employer for meals that are provided to employees through an eating facility or that meet the requirements for de minimis fringe benefits at the workplace (such as coffee and donuts, working meals, and overtime meals) are limited to a 50% deduction of the expense, and no deduction is allowed after 2025. The final BBA continues to disallow this deduction after 2025, but provides two exceptions aimed to benefit the fishing industry, particularly in extreme/remote areas like Alaska. These exceptions are available for meals provided on certain fishing vessels, fish processing vessels, or fish tender vessels; or at certain facilities for the processing of fish for commercial use or consumption which are located in the U.S. north of 50 degrees north latitude and not located in a metropolitan statistical area.
Continued Deduction of Qualified Bicycle Commuting Reimbursement - Before the enactment of the TCJA, employers were permitted to deduct expenses related to "Qualified Transportation Fringe Benefits" provided to employees. These benefits included free parking, transit passes, parking reimbursements, and bicycle commuting reimbursements. The TCJA eliminated the employer's ability to deduct most of these benefits, with the exception of qualified bicycle commuting reimbursements, which remained deductible. In the original draft of the BBB, the House proposed eliminating the deduction for bicycle commuting reimbursements, effectively removing all employer deductions for Qualified Transportation Fringe Benefits. However, the final BBB retains the deduction for bicycle commuting reimbursements.
No Tax Deduction for Qualified Moving Expenses - Before the enactment of the TCJA, employers were allowed to deduct the cost of qualified moving expenses, and employees could exclude such reimbursements from their taxable income. The TCJA repealed these provisions, except for members of the U.S. Armed Forces or the intelligence community, effectively eliminating the employer deduction and requiring employees to treat moving expense reimbursements as taxable income. The final BBB maintains these TCJA changes, continuing the disallowance of employer deductions and employee income exclusions for most moving expense reimbursements.
Increased Employer Child Care Tax Credit – The final BBB increases the amount of tax credits that employers may claim for employer-provided child care. Effective for amounts paid or incurred after December 31, 2025, employers may claim up to 40% of their qualified child care expenses, up to a maximum credit of $500,000 (and eligible small businesses can clam up to 50%, up to $600,000). This amount is indexed in future years.

Tax-Exempt Organizations

Expanded Excise Tax on Excess Compensation - Code Section 4960 was added as part of the TCJA to impose an excise tax on executive compensation amounts over $1 million (and any excess parachute payments) paid to the five (5) highest paid executives (the "covered employees") and any former covered employees of "applicable tax-exempt organizations" ("ATEOs"). ATEOs include organizations exempt under section 501(a) of the Code, including 501(c)(3), 501(c)(4) and 501(c)(6) organizations, farmers' cooperatives under 521(b)(1), and some governmental and political entities. The BBB broadens these rules, effective for tax years beginning after December 31, 2025, to require ATEOs to pay an excise tax on any compensation amounts over $1 million (and any excess parachute payments) paid to any employee or former employee who was employed during any tax year beginning after December 31, 2016 (regardless of whether he or she would have been a "covered employee" under the old rule).
No UBTI Adjustment for Qualified Transportation - The TCJA required tax-exempt organizations, excluding churches and their affiliates, to increase their unrelated business taxable income ("UBTI") by the amount of qualified transportation fringe benefits provided to employees. UBTI refers to income generated by a tax-exempt entity from activities unrelated to its exempt purpose. The House's version of the BBB proposed continuing to disallow deductions for expenses related to qualified transportation fringe benefits or parking facilities not directly connected to an unrelated trade or business, but this provision was not included in the final BBB. As a result, tax-exempt organizations are no longer required to increase their UBTI to reflect the amount of qualified transportation fringe benefits provided to employees.

Employer/Plan Sponsor Action Steps:

Since most of the benefits and compensation-related provisions of the BBB do not take effect until after the end of 2025 (or in several cases, after 2027), there are generally no urgent actions that must be taken by employers or plan sponsors at this time. Instead, employers and plan sponsors should work with their brokers and legal advisors before year-end to make sure that their plan documents and policies properly reflect these changes, especially changes to the dependent care assistance and other benefits limits that might be specified in existing plan documents and communications.

The one retroactive change that may require immediate employer action is the BBB provision retroactively allowing first dollar HDHP coverage of telehealth services before the participant has satisfied his or her HDHP deductible. It is not yet clear whether it will be too administratively difficult at this point for plan sponsors to go back and retroactively permit first dollar telehealth coverage for the entire 2025 plan year, or whether they will instead choose to permit such coverage on a prospective basis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.