On July 4, 2025, the “One Big Beautiful Bill Act” (OBBBA), a federal budget reconciliation bill, was signed into law by President Donald Trump, and it contains several provisions impacting executive compensation, employee benefits and health and welfare plans.
While many changes do not take effect until January 1, 2026, several items require immediate attention from plan sponsors to ensure timely plan amendments and compliance.
Below is a summary of the executive compensation and employee benefits provisions enacted under OBBBA:
Executive Compensation Provisions
- Individual Income Tax Rates Under the Tax Cuts and Jobs Act (TCJA) Were Made Permanent – OBBBA maintained the seven individual income tax brackets that were set to expire but adjusted tax rates and income levels. The top rate remains 37% with other rates of 35%, 32%, 24%, 22%,12% and 10%.
- Expanded Excess Compensation Excise Tax on Tax-Exempt Organizations – Effective 2026, under Internal Revenue Code (IRC) Section 4960, which imposes a 21% excise tax on tax exempt organizations that pay annual compensation over $1 million or certain severance payments to certain employees known as covered employees now applies to all employees who are paid over $1 million annually, rather than just the top five highest compensated employees. Certain termination-related payments above this threshold may also be considered subject to this excise tax. Observation: Employers should evaluate compensation agreements to identify exposure and ensure proper reporting.
- Excess Compensation and Deduction Limitations for Public Companies with Aggregation – Effective January 2026, IRC Section 162(m) which limits the tax deduction for remuneration of over $1 million paid to certain covered executives of public companies is expanded by the OBBBA to apply the tax deduction disallowance to compensation paid from the members of the public company’s controlled or affiliated service group. Observation: Employers should evaluate the impact of this expansion of the deduction disallowance for remuneration paid to certain covered executives by members of the public company’s controlled or affiliated service group to identify exposure and ensure proper reporting on how much compensation the employer and its affiliates deduct.
- No Federal Income Tax on Tips – From January 1, 2025, through December 31, 2028, certain cash tips received by service workers will be exempt from federal income tax up to certain limits ($25,000/individual and phased out for income over $150,000). The amounts will still be subject to Social Security and Medicare tax. Internal Revenue Service or Treasury will need to provide a list of the occupations qualifying for this exemption for employers. Observation: Employers must separately report the amount of the qualified tips on Forms W-2 or 1099. Employers should be aware that states may not adopt this federal income tax exemption.
- No Federal Income Tax on Overtime – OBBBA provides a deduction from federal income tax for certain individuals to claim equal to a certain amount of qualified overtime compensation effective for tax years 2025 through 2028. The allowable qualified overtime compensation is defined as overtime compensation paid to an individual required under Section 7 of the Fair Labor Standards Act (FLSA) that is in excess of the regular rate. The allowable qualified overtime exemption is taken as an above-the-line deduction on the federal return of an amount provided on the employees’ Form W-2 or Form 1099. The exemption is limited to $12,000 per employee for single tax filers ($25,000 for married filing joint) and phased out for income above $150,000. This does not include amounts received as tips or by highly compensated employees. Observation: The amounts will still be subject to Social Security and Medicare tax. Employers must update payroll systems and coordinate reporting. This does not apply to state taxes.
Employee Benefits Provisions
- Bicycle Commuting Reimbursement Tax Benefit Permanently Eliminated – For tax years beginning in 2026, employer-provided reimbursement for employee bicycle commuting expenses will be permanently taxable under federal tax law. Observation: The other parking and transit benefits are not changed. Regarding the elimination of the bicycle commuter reimbursement benefit, employers must check state laws as they may have different treatments of this benefit.
- Moving Expenses Reimbursement Exclusion Permanently Eliminated – Effective January 1, 2026, moving expense reimbursements are taxable income, subject to withholding and not deductible by employees except for members of the Armed Forces and the intelligence community.
- Family and Medical Leave Credit Made Permanent – Employer provided wages paid to employees under the Family and Medical Leave Act (FMLA) are entitled to a credit based on the percentage of employee wages paid while on leave or total premiums paid by the employer for insurance regarding the paid family leave subject to certain limitations under IRC Section 45S. Under OBBBA, effective for tax years after December 31, 2025, the scope of the credit is expanded, and the work requirement was reduced to include employees employed for six months instead of one year.
- Dependent Care Assistance Program Enhanced – Effective January 1, 2026, OBBBA increased the annual contribution amount for dependent care assistance programs or DCAPs under IRC Section 129 from $5,000 to $7,500 for married filing jointly; and for married filing separately, the amount is increased to $3,750. Observation: Employers will need to be sure they have a written plan document, and it provides for this increase in the amount of the annual contribution limit. Employers will need to provide reasonable notice to employees of this plan. Employers will also need to coordinate this increase in the amount of the allowable contribution with payroll and relevant vendors including conducting IRC Section 129 required non-discrimination testing. Employers will need to determine if employees’ contributions are limited due to the required testing results.
- Child Tax Credit Adjusted – The child tax credit is increased from $2,000 to $2,200 for each qualifying child and allows for annual cost of living adjustments.
- Employer Provided Child Care Credit – OBBBA permanently increases the employer provided childcare credit available under IRC Section 45F from $150,000 to $500,000 and the percentage of childcare expenses that would qualify would increase from 25% to 40%. OBBBA created separate credit for small businesses that increases the employer provided childcare credit to $600,000 and increases the percentage of childcare expenses qualifying to 50%.
- Educational Assistance Programs – OBBBA indexed for cost of living the annual $5,250 tax exclusion for educational assistance programs for employees under IRC Section 127.
- Tax Free Student Loan Repayment Assistance Made Permanent – Effective for payments made after 2025, OBBBA permanently allows employers to continue to pay or reimburse employees’ student loans on tax fee basis. Under IRC Section 127(b) which provides the educational assistance program allowance of amounts up to $5,250 per year (now indexed for cost of living) for repayment tax free of each employee’s student debt. This tax-free annual amount is combined for both educational assistance and student loan repayment assistance for each employee. Observation: Employers who have not already set up this type of plan will need a written educational assistance plan document to provide this tax-free benefit. Employees must be notified in writing of the plan and its provisions, and the plan in application must not be discriminatory in favor of highly compensated employees in its application.
- Meals Expense Deduction – OBBBA provides an exception from the IRC Section 274 meal expense disallowance for certain employers. Under the amendment to IRC Section, the 100% deduction disallowance will not apply to restaurants that provide meals for their employees and certain fishing vessels and fish processing facilities that provide meals for their employees.
- Trump Accounts – OBBBA established certain investment vehicles known as Trump accounts which can be set up for children who have not turned 18 during the year it is established. These savings accounts are similar to individual retirement accounts but not ROTH IRAs. Trump accounts have restrictions on the type of investments which are allowed. Employers may contribute up to $2,500 annually (indexed for inflation) tax-free to their eligible employees’ Trump accounts for employees‘ dependents under 18 years of age. The employer will need to establish a program that satisfies non-discrimination requirements to provide tax-free contributions to the Trump accounts. Parents and taxable entities can contribute additional amounts to the Trump accounts, but they will not be tax-free over the amount of $2,500 of employer contributions and the aggregate limit for the contributions to the Trump accounts from the parents or taxable entities is $5,000 annually (indexed for inflation) and earnings will be tax-free. Also, tax exempt entities may also contribute to the Trump accounts and are not subject to the $5,000 limitation but are subject to other restrictions. Additionally, under OBBBA, for children born between January 1, 2025, and December 31, 2028, the federal government will provide a $1,000 contribution for these individual accounts, if requested by their parents. This amount will be separate from the $5,000 limit for contributions from the parents. Observation: Employers will need to set up compliant written plan documents for these new accounts and to satisfy requirements similar to IRC Section 129 dependent care assistance programs which include non-discrimination testing. Treasury and IRS are expected to issue guidance on implementing the Trump accounts.
Health and Welfare Plans Provisions
- Certain Direct Primary Care Service Arrangements HSA Compatible as Permitted Coverage – For individuals who participate in Health Savings Accounts (HSA) and must not also have a non-high-deductible health plan (HDHP) coverage, which is considered disqualifying coverage, effective beginning in 2026, OBBBA exempts certain direct primary care service arrangements (DPCSA) from being considered as disqualifying coverage. To satisfy this exemption, the DPCSA must provide a monthly fixed fee for certain direct primary care services that do not exceed $150/month for an individual and $300/month for several individuals to now qualify as an HSA eligible medical expense. The primary care services that can be provided do not include use for procedures requiring general anesthesia, prescription drugs other than vaccines and lab services not typically provided in ambulatory primary care setting.
- High-Deductible Health Plan Pre-Deductible Safe Harbor for Telehealth Made Permanent – Under this provision, telehealth coverage and other remote care will permanently be considered permitted coverage and available before the high-deductible plan (HDHP) limit is attained and without affecting HSA eligibility. OBBBA retroactively and permanently applied after December 31, 2024, as the provision enacted during COVID under the CARES Act only provided this as a temporary Safe Harbor.
- Certain Exchange Coverage Treated as HSA Compatible Coverage – Beginning in 2026, OBBBA provides HSA compatible coverage will include bronze and catastrophic individual plan coverage obtained on the Affordable Care Act (ACA) healthcare exchanges. This allows individuals who are enrolled in these plans to contribute to HSAs as it will be considered HDHP coverage.
Affordable Care Act (ACA)
- Premium Tax Credits Limitations – Under OBBBA, eligibility to receive ACA premium tax credits depends on the immigration status of the individual. The law restricts eligibility to U.S. citizens and lawful permanent residents and certain immigrants. It also prevents access to premium credits if the enrollment is during special enrollment period due to a change in the individual’s household income, effective after December 31, 2027. It also applies restrictions to eligibility for the premium credit for lawful immigrants with certain amounts of household income and regarding Medicare eligibility, effective for plan years after December 31, 2025.
Plan Sponsors and Fiduciary Review of Operational Compliance
- IRC, ERISA and Fiduciary Oversight of Regulatory Developments – Plan sponsors will need to address the changes in the law under OBBBA and review whether employee plans comply in operation with the developments in the law and plan terms.
- Mitigating Risk of Fiduciary Liability – Plan Sponsors will need to ensure they have fiduciary best practice governance in place regarding management of their employee benefit plans. A comprehensive governance plan and well documented processes to address the IRC and ERISA regulatory compliance requirements will assist in reducing potential liability relating to the increase in fiduciary litigation.
- State Regulatory Developments of PBMs and ERISA – A growing number of states are enacting legislation aimed at Pharmacy Benefit Managers (PBMs) as focus grows on the need for transparency on drug prices and rebates. Plan sponsors with self-funded medical plans which are governed by ERISA will need to address their fiduciary duty to monitor their vendors such as PBMs and assess compliance with state disclosure requirements regarding PBMs to determine if they conflict with ERISA.
Immediate Employer Action Items
- Review executive compensation agreements for exposure under expanded excise tax and deduction rules.
- Update payroll systems to account for new overtime and tip exemptions.
- Amend dependent care and educational assistance plan documents.
- Adopt or update student loan repayment assistance plans.
- Prepare communications to employees regarding benefit changes (e.g., DCAP, FMLA leave credit, Trump accounts).
- Coordinate with payroll vendors, third-party administrators, and benefits counsel to ensure compliance.
- Review ACA plan eligibility and potential impact on premium tax credits.
- Strengthen fiduciary governance and vendor oversight, particularly for PBMs.
Next Steps for Employers
OBBBA provides changes to many executive compensation and employee and benefit provisions. Employers will need to address the changes in the law and tax provisions that were made permanent and some with increases in amounts or scope from prior provisions under the Tax Cuts and Jobs Act (TCJA) and the Coronavirus, Aid Relief and Economic Security Act (CARES Act).
Employers should update reporting processes, payroll systems, handbooks, and benefit plan documents, and coordinate with vendors to ensure compliance.
How Frier Levitt Can Help
If you have any questions or need additional information on the One Big Beautiful Bill Act, Internal Revenue Code impacts, ERISA fiduciary compliance requirements or want to schedule a consultation, please contact Frier Levitt. Our attorneys have decades of experience addressing executive compensation and employee benefit plan matters and would be glad to assist with your requests or questions.
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