Key Takeaways
- On July 4, President Donald Trump signed wide-ranging tax legislation, P.L. 119-21 (the Legislation). The Legislation will affect nearly every sector of the economy and every type of taxpayer.
- We previously published, on July 8, a comprehensive alert providing a summary and analysis of the Legislation.
- In this alert, which is part of an eight-part series taking a deeper dive into various portions of the Legislation (International Tax; Tax Credits and Opportunity Zones; Estate Planning and Individual Taxes; Renewable Energy Credits; Employer-Related and Executive Compensation; Start-Up Investors and Business Owners; Health Care; and Exempt Organizations), we explain and analyze the implications of the Legislation provisions impacting employer-sponsored benefits plans and executive compensation.
There is a possibility for one or more additional reconciliation bills during late 2025 and 2026, and therefore additional opportunities for enactment of additional provisions, as well as changes and improvements to the Legislation. And the importance of engaging with the IRS and Treasury as they develop guidance to implement some of the more complex provisions cannot be overstated.
While multiple benefit-related provisions in earlier drafts did not make it into the Legislation, the Legislation contains a handful of provisions that affect benefits provided by employers and provisions related to compensation paid to certain employees.
Health Savings Account Changes
Current health savings account (HSA) rules prohibit individuals from making contributions to an HSA under certain circumstances. The Legislation liberalizes a few of these rules.
Telehealth
A COVID-era exemption previously allowed individuals to maintain eligibility to make HSA contributions even though receiving telehealth services without applying a deductible. The Legislation retroactively reinstates the exemption to when the original exemption expired – and makes the exemption permanent.
Ever since its debut, the ability to use telehealth services before application of a plan deductible was popular with employers and employees, which led to significant employer advocacy to prevent its expiration. Accordingly, its permanent reinstatement has been warmly received.
Direct Primary Care Service Arrangements
The Legislation allows an individual to remain eligible to make HSA contributions if the individual participates in a “direct primary care service arrangement” (DPCSA), which generally means an arrangement whereby the individual receives primary care services from primary care providers in exchange for a fixed fee. This eligibility rule does not apply if the fixed fee exceeds $150 per month ($300 per month if the arrangement applies to multiple individuals), and such amounts will be adjusted annually. In addition, DPCSA fees are treated as medical expenses that may be paid using an HSA.
These DPCSA changes apply to months beginning after Dec. 31. The Legislation also directs the Treasury Secretary to issue related guidance.
As DPCSAs continue to gain traction in the U.S., it is not surprising that there would be a push to allow those using them to maintain eligibility to make HSA contributions.
Educational Assistance
Employers may offer certain amounts of educational assistance tax-free to employees. The definition of “educational assistance” was previously expanded to include assistance related to an employee’s student loans. The Legislation makes permanent this expansion, which had been set to expire at the end of 2025. The Legislation also adds language providing for an inflation adjustment with respect to the maximum tax exclusion (currently $5,250) for educational assistance furnished in a calendar year.
Without a pending expiration date, employers may now be more willing to expend the time and effort to create and administer a student loan assistance benefit. In 2024, the IRS released FAQs and a model plan document, which many employers ignored at the time since 2025 was scheduled to be the last year during which student loan assistance would qualify as educational assistance.
Given the prevalence of student loan debt in the U.S., most employees likely would value any student loan assistance benefit offered. For example, the Congressional Research Service reported earlier this year that (1) one in six adults (almost 43 million people) have federal student loan debt; (2) the average student loan debt is $16,900 for undergraduate degrees and $32,700 for master’s degrees; and (3) the aggregate amount of outstanding federal student loan debt is over $1.6 billion. Those amounts do not account for private student loans.
Dependent Care Flexible Spending Account Contribution Increased to $7,500 ($3,750 for Married Individuals Filing Separately)
Employers may offer employees dependent care flexible spending accounts (DCFSAs), to which employees generally are permitted to contribute wages pretax and that they then may use the DCFSA to reimburse dependent care expenses incurred by the employee on a tax-free basis. For many years, the maximum DCFSA contribution amount has been $5,000 ($2,500 for married individuals filing separately). The Legislation increases those amounts to $7,500 and $3,750, respectively, for tax years beginning after Dec. 31, 2025. The increased amounts are static and will not be annually adjusted.
This is a welcome increase given the prevailing costs of dependent care. In a web post last year, the U.S. Department of Labor noted that, based on 2022 data, “U.S. families spend between 8.9% and 16.0% of their median income on full-day care for just one child.”
While the maximum contribution amount changed, the DCFSA nondiscrimination rules did not. Thus, an employer’s highly compensated employees may still be limited in the amount that they can contribute to their DCFSAs.
Commuter Benefit Programs
The ability to offer tax-free reimbursement for bicycle commuting expenses, sometimes called a “transportation fringe,” has been permanently eliminated by the Legislation.
Employers generally will not notice this change because the ability to offer tax-free bicycle commuting expenses had already been suspended for multiple years before the Legislation was enacted.
Any discussion of commuter benefits serves as a good reminder that multiple state and local governments have passed commuter benefit requirements for employers located in their jurisdiction (e.g., San Francisco Bay area, Chicago metropolitan area). Employers should make sure they are aware of, and compliant with, such requirements.
Executive Compensation in Excess of $1 Million
Currently, public companies may not deduct compensation above $1 million per year per “covered employee,” which, in 2025, includes the CEO, the CFO and the next three most highly paid executive officers (as well as anyone previously designated as such after 2017). IRS regulations currently apply the Section 1504 affiliated group rules to determine which amounts of compensation may be nondeductible.
The America Rescue Plan Act of 2021 (ARP) amended IRC Section 162(m) to expand the number of employees subject to the $1 million deduction limitation from five to 10 for taxable years beginning after Dec. 31, 2026. Under the ARP, the identification of the next five highly compensated employees is to be made without regard to whether the employee is an officer of the public company or its subsidiaries.
Under the Legislation, for tax years beginning after Dec. 31, 2025, Section 162(m) is modified to generally apply to “specified covered employees” in the public company’s controlled group. A specified covered employee’s compensation from all controlled group members will be considered and, in determining who the specified covered employees are, including the so-called ARP five beginning in 2027, identifying the five highest-paid employees is to be determined by analyzing the entire controlled group’s employee population. The controlled group under the Legislation is to be determined under Section 414 beginning in tax years ending after Dec. 31, 2025, and includes entities other than corporations. There is a corollary provision expanding the definition of Section 4960-covered employees of exempt organizations in the form of a 21 percent excise tax on compensation exceeding $1 million, which the Legislation modifies for tax years beginning after Dec. 31, 2025.
The impact of certain of these changes will depend, in part, on the extent to which the public company pays employees from multiple members of its controlled group.
Public companies should set up and test their systems and reporting functionality across the controlled group so that they can prepare for implementing this new methodology to identify specified covered employees.
Deduction for Employer-Provided Meals
Effective for amounts paid or incurred after Dec. 31, 2025, the Tax Cuts and Jobs Act added a prohibition on deductions for certain expenses related to (1) meals provided to employees and their spouses and dependents by the employer on its premises and (2) an employer’s operation of an eating facility for employees (including food and beverage costs). The Legislation retains this deduction prohibition but adds a small carve-out. Specifically, the deduction prohibition will not apply if the expenses relate to (i) a good or service for which the employer receives adequate consideration in a bona fide transaction or (ii) food or beverages provided on or at certain commercial vessels, oil or gas platforms, or fishing vessels or fish processing facilities.
This provision serves as an important reminder that the employer-provided meal deduction generally terminates at the end of this year.
Conclusion
With the first budget reconciliation bill of this Trump administration enacted, taxpayers should determine the expected impacts and consider adjustments and compliance issues as appropriate.
Employers also should decide if they want to make any plan changes based on the Legislation (e.g., increasing the DCFSA maximum contribution) and then determine what, if any, plan amendments or participant communications are necessary. With many employers already in the process of determining their 2026 benefit offerings and open enrollment planning, careful thought should be given to the Legislation in the near term.
Some of the proposed changes and spending cuts that were dropped solely because the Senate parliamentarian ruled that inclusion would have violated the Byrd Rule, which governs the reconciliation process, may be revisited during the FY 2026 appropriations process and through stand-alone legislation during the remainder of the 119th Congress. With respect to provisions included in the Legislation, taxpayers should turn their focus toward offering input as Treasury and the IRS develop and issue implementing regulations and related guidance.
One or more additional reconciliation bills are likely during late 2025 and 2026, which presents opportunities for enactment of additional provisions, as well as changes, corrections and improvements to the Legislation.
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