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The OBBB Act Includes Changes for Employee Benefits

On July 4, 2025, President Donald Trump signed a major tax and spending bill, commonly referred to as the “One Big Beautiful Bill Act” (OBBB Act), into law. The OBBB Act includes changes for employee benefit plans, including provisions that:
 
  • Expand the availability of health savings accounts (HSAs);
  • Permanently extend the telehealth exception for high deductible health plans (HDHPs);
  • Increase the maximum annual limit for dependent care flexible spending accounts (FSAs);
  • Allow employers to help pay employees’ student loans beyond 2025 and make cost-of-living adjustments to the tax exclusion for educational assistance programs; and
  • Allow employers to contribute up to $2,500 per year to a new type of tax-advantaged account for children, called a “Trump Account.”

HSA Expansion

Only eligible individuals can establish HSAs and make HSA contributions (or have them made on their behalf). To be HSA-eligible, an individual must:
 
  • Be covered by an HDHP;
  • Not be covered by any health plan that provides coverage below the minimum required HDHP deductible, with some limited exceptions;
  • Not be enrolled in Medicare; and
  • Not be eligible to be claimed as a dependent on another person’s tax return.
Effective Jan. 1, 2026, the OBBB Act expands HSA eligibility by allowing individuals with direct primary care (DPC) arrangements to make HSA contributions if their monthly fees are $150 or less ($300 or less for family coverage). These dollar limits will be adjusted annually for inflation. A DPC arrangement is a subscription-based health care delivery model where an individual is charged a fixed periodic fee for access to medical care consisting solely of primary care services. In addition, the OBBB Act treats DPC fees as a medical care expense that can be paid for using HSA funds.
 
Also, to expand the accessibility of HSAs in the individual market, the OBBB Act categorizes as HDHPs all bronze plans and catastrophic plans that are available through an Affordable Care Act (ACA) Exchange. This change is effective Jan. 1, 2026. Bronze plans have the highest deductibles and lowest premiums among the four categories (or metal levels) of individual plans. Catastrophic plans have lower premiums than bronze plans and very high deductibles.

HDHP Telehealth Exception

To be eligible for HSA contributions, individuals cannot be covered by a health plan that provides benefits, except preventive care benefits, before the minimum HDHP deductible is satisfied for the year. Historically, individuals who were covered by telehealth programs that provided free or reduced-cost medical benefits were not eligible for HSA contributions.
 
A pandemic-related relief measure temporarily allowed HDHPs to waive the deductible for telehealth services without impacting HSA eligibility. This relief expired at the end of the 2024 plan year. However, the OBBB Act permanently extends the ability of HDHPs to provide benefits for telehealth and other remote care services before plan deductibles have been met without jeopardizing HSA eligibility. This extension applies to plan years beginning after Dec. 31, 2024.

Dependent Care FSAs

Employers can provide dependent care assistance benefits for their employees on a tax-free basis, subject to a maximum annual limit. These benefit plans are referred to as dependent care FSAs (or dependent care assistance programs, DCAPs). Effective Jan. 1, 2026, the OBBB Act increases the maximum annual limit for dependent care FSAs to $7,500 for single individuals and married couples filing jointly and $3,750 for married individuals filing separately (up from $5,000 and $2,500, respectively). The new limit is not adjusted for inflation.

Educational Assistance Programs – Student Loans

Employers can offer programs to provide employees with undergraduate or graduate-level educational assistance. Educational assistance programs can pay for employees’ books, equipment, supplies, tuition and other fees. Also, these programs can pay principal and interest on employees’ student loans. The option to use educational assistance programs for student loans was set to expire on Dec. 31, 2025. However, the OBBB Act permanently extends this student loan payment option.
 
Also, tax-free benefits under an educational assistance program are limited to $5,250 per employee per year. Typically, educational assistance provided above this level is taxable as wages. Effective for taxable years beginning after 2026, the OBBB Act annually adjusts the $5,250 limit for inflation.

Trump Accounts

The OBBB Act creates a new type of tax-advantaged savings account for children under age 18, named a “Trump Account.” Effective in 2026, Trump Accounts will operate similarly to individual retirement accounts, or IRAs, where earnings grow tax-deferred. In general, annual contributions are limited to $5,000 per child (as adjusted annually for inflation beginning after 2027). The OBBB Act provides that children born in 2025-2028 may be eligible to receive a special $1,000 contribution from the federal government.
 
Employers may make tax-free contributions to the Trump Account of an employee or an employee’s dependent of up to $2,500 per year (as adjusted annually for inflation beginning after 2027). These programs will require a written plan document and will be subject to some of the same tax rules that apply to dependent care FSAs, such as annual nondiscrimination testing and employee notifications.

Additional OBBB Act Provisions

Among the provisions above, the OBBB Act also allows:

  • Employers to take a credit for paid family and medical leave expenditures.
  • Certain workers an above-the-line deduction for “qualified tips” and “qualified overtime compensation” for taxable years beginning after Dec. 31, 2024, and ending for taxable years beginning after Dec. 31, 2028.

The OBBBA budget bill affects a tax code provision that allows employers to take a credit for their paid family and medical leave (PFML) expenditures. In brief, the OBBBA makes the tax credit permanent and broadens its coverage to PFML insurance premiums and leave taken by newer employees than previously allowed, among other changes. The amendments apply to taxable years beginning after Dec. 31, 2025.

Background: PFML Tax Credit

The PFML tax credit was included in the 2017 Tax Cuts and Jobs Act. Prior to the amendments, it was equal to a percentage of wages paid through Dec. 31, 2025, to qualifying employees who took family and medical leave.

Employers must provide at least two weeks of paid family and medical leave at a payment rate that is at least 50% of an employee’s normal pay rate for the credit to apply. As it currently stands, before the amendments take effect, the credit does not apply to leave required by state or local law or paid for by state or local governments. It also does not apply to vacation leave, personal leave or sick leave.

OBBB Act Amendments

Most importantly, the OBBBA makes the PFML tax credit permanent by removing the sunset provision that would have seen the credit expire at the end of 2025.
 

The OBBBA amended the tax credit in other ways, including by allowing employers with PFML insurance to take the credit for a percentage of their premiums. As part of a growing trend, states have begun allowing insurance carriers to sell employers policies that cover the cost of PFML provided voluntarily. Moreover, the OBBBA allows the PFML tax credit for this premium expense even if none of the employer’s workers actually take PFML. 

Under the amendments, leave paid by a state or local government or required by state or local law will be taken into account in determining the amount of PFML provided by the employer, but not in determining the amount of the tax credit.   

 
Furthermore, the tax credit was previously available only for PFML taken by employees who had worked for the employer for at least one year. Under the OBBBA amendments, the work tenure requirement is reduced to six months. Another amendment stipulates that the PFML credit will apply only to leave taken by employees who work at least 20 hours per week.
 
Next Steps for Employers
 
Employers that provide PFML voluntarily should review the amendments and their leave policies to determine whether they qualify for this potentially valuable tax credit.
 

The OBBBA tax and spending bill allows certain workers an above-the-line deduction for “qualified tips” and “qualified overtime compensation” for taxable years beginning after Dec. 31, 2024, and ending for taxable years beginning after Dec. 31, 2028.

Tip Deductions

Section 70201 of the OBBBA creates a new above-the-line tax deduction for qualified tips. Individuals must earn $150,000 or less ($300,000 if married filing jointly) in 2025 to be eligible for the tip deduction. The maximum deduction for tip income is capped at $25,000 per year, and the deduction only applies to cash tips, which include tips that are charged and tips received under a tip-sharing agreement. To be considered a qualified tip, the tip must be paid voluntarily without any consequence in the event of nonpayment, not be subject to negotiation, and be determined by the payor.
 
To qualify for the tip deduction, individuals must work in occupations where receiving tips is customary (e.g., servers, bartenders, hotel staff, hairstylists) on or before Dec. 31, 2024. The Treasury Department will publish a list of qualifying occupations within 90 days of the OBBBA’s enactment. Qualified tips must be reported on statements furnished to the individual as required under the Internal Revenue Code (e.g., Form W-2) or on Form 4137. The OBBBA does not change the requirement that employees and employers report all tips to the IRS. Individuals must include their Social Security number (and, if married and filing jointly, their spouse’s Social Security number) on their tax return to receive the deduction.
 
Overtime Deductions
 
Section 70202 of the OBBBA establishes a new above-the-line tax deduction for qualified overtime compensation. The OBBBA defines “qualified overtime compensation” 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 at which the individual is paid. The maximum deduction for overtime income is capped at $12,500 per year ($25,000 per year if married filing jointly). The deduction decreases for those earning over $150,000 per year. Employers must include the total amount of qualified overtime compensation as a separate line item on employees’ Form W-2. Qualified tips cannot be claimed as qualified overtime compensation. Similar to qualified tips, individuals must include their Social Security number (and, if married and filing jointly, their spouse’s Social Security number) on their tax return to receive the deduction.
 
Next Steps for Employers
 
Employers may need to adjust their payroll systems to accurately track and report qualifying tips and overtime compensation on employees’ Forms W-2.

This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. © 2025 Zywave, Inc. All rights reserved.

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Caitlin Rimmer
Caitlin is a Catawba College graduate and the Marketing Communications Coordinator at Parrott. She manages social media, website updates, client communications, and marketing materials.