Certain Coverage or Benefits Allowed with Health Savings Account Contributions. Telemedicine can continue to be offered to employees participating in a high-deductible health plan without the employees in such a plan losing the ability to make tax-deductible contributions to a Health Savings Account. This is effective back to January 1, 2025, so employees whose employers continued telemedicine coverage after 2024 will still be able to make a tax-deductible contribution to their HSA. Certain other changes related to payments by individuals for “direct primary care” are now permitted by persons contributing to an HSA.
Overtime Deduction for Employees and Employer Related Reporting. The promised no tax on overtime does not mean such amounts are excluded from the employee’s W-2 income or from calculating the employee’s retirement plan compensation and related employer contributions. This provision is effective for amounts paid on or after January 1, 2025, and through December 31, 2028, so this is a temporary change. For the individual, this deduction phases out based on the individual’s modified adjusted gross income in excess of $150,000 ($300,000 for married filing joint returns), so the deduction may not be as great for some individuals. Overtime pay remains subject to income tax withholding, at least until the Internal Revenue Service (“Service”) issues guidance altering the withholding rules. Overtime pay is pay in excess of the “regular rate of pay” under the Fair Labor Standards Act. The tax benefit for employees earning overtime comes when they file an income tax return and can take a deduction for up to $12,500 of overtime (single filer) or $25,000 for married filing jointly.
The overtime will still be included in the gross compensation on the Form W-2 and there was no change to take the overtime out of the retirement plan compensation, so the overtime will still be included in calculating the employer’s retirement contributions. Employers will need to prepare for accumulating amounts paid in excess of the “regular rate of pay” to be able to report this to the employees. For 2025, employers may reasonably approximate the amount, while they wait for Service guidance on the “reasonable approximation” calculation.
Tip Compensation Deduction for Employees and Employer Related Reporting and Withholding Changes. Employers who have employees who were customarily compensated in part by tips as of December 31, 2024, and who are specified in guidance, will be able to deduct from their income up to $25,000 of tips received. Such deduction is phased out for individuals with modified adjusted gross income in excess of $150,000 ($300,000 for married filing joint returns). The deduction for the individuals stops as of December 31, 2028. Employers are required to report the tips on the Form W-2 or 1099 issued to the tip recipient. The list of positions that customarily received tips and who are eligible for the tip deduction and subject the employer to the reporting requirements is to be issued around September 2, 2025, the 90th day after the law was signed. This deduction applies beginning in 2025, and employers must adjust their withholding for this deduction by January 1, 2026.
Increased Education Benefit in 2027. Employers providing educational assistance of up to $5,250 per year per employee may continue to provide that as assistance toward a degree or as payment of student loans. Beginning on and after December 31, 2026, the dollar limit will be indexed and increase for 2027 and later years. Employers will need to watch for this additional indexed limit for 2027.
Increased Dependent Day Care Flexible Spending Account Benefit. Beginning after December 31, 2025, employers may permit employees to make contributions to dependent day care flexible spending accounts of up to $7,500 per year (married filing jointly) or ($3,750 for married filing separately). The increase in this limit may impact the nondiscrimination testing for this benefit as it is more frequently utilized by highly compensated employees. Employers may want to project the impact of the higher limit on the nondiscrimination testing and consider whether to use it or limit its use by plan design. The employer provided childcare tax credit increased to 40%.
Moving Expenses Continue to Not Be Deductible. Moving expenses paid by employers will continue to not be deductible by employers or excluded from the employee’s income for amounts paid after December 31, 2025. The exclusion from taxation for moving expenses paid by an employer continues to apply to members of the armed forces moving pursuant to orders and now also to certain members of the intelligence community.
Companies with Publicly Traded Securities See Expansion of Individuals Subject to $1,000,000 of Compensation Deduction Limit. For tax years after December 31, 2025, the calculation of the individuals who are subject to the Code section 162(m) limit on tax deductible compensation was extended to apply to all members of the controlled group of companies of the entity with publicly traded securities. Companies should begin planning for the changes now so as to capture the correct individuals in the limitation and plan for allocation of the limitation to the various entities employing these individuals.
Tax Exempt Employer Compensation Paid to Individual in Excess of $1,000,000 or Paid as an Excess Parachute Payment Subject to Excise Tax Also Expanded. Effective for tax years beginning after December 31, 2025, the individuals whose compensation exceeds either the $1,000,000 limit or which constitutes an excess parachute payment were expanded to apply to any current or former employee of a tax-exempt organization who was employed on December 31, 2016, and this is effective for tax years beginning after December 31, 2025. Tax exempt employers should begin to determine which employees or former employees were employed on December 31, 2016, are being paid compensation by the entity after December 31, 2025.
Bicycle Commuting Expenses No Longer Permitted as a Tax Favored Fringe Benefit. Effective immediately the federal income tax exclusion for qualified bicycle commuting is permanently repealed. This means any reimbursements for such bicycle commuting expenses must be included in the individual’s federal income and on Form W-2 as taxable income. Employers should review how such amounts are coded in their payroll system to ensure that they will be reported correctly.
Trump Accounts. The new law provides a new tax advantage account for children. The children must be born in the U.S. between January 1, 2025, and December 31, 2028, and have social security numbers. Each of these selected children will receive a one-time contribution from the federal government of $1,000. This account is similar to an individual retirement account. It can be used to save for the child or to pay for certain designated expenses (higher education, first time home purchases, birth or adoption, or emergencies). Additional contributions by the parents, or other family members and the employer can be made.
Employers desiring to contribute to a Trump Account for an employee’s child need to have a plan document, conduct nondiscrimination testing on their contributions, and evaluate the potential considerations such as pay equity issues, potential discrimination against certain groups, and calculation of the regular rate of pay and overtime for persons having children in this limited time period. The impact of adding employer contributions to a Trump account for a group of employees needs to analyze the impact of such benefit on all aspects of the employer’s operations, including compliance with employment as well as tax laws.
Other News Items to Note
On August 7, 2025, another executive order was issued directing the U.S. Department of Labor (“DOL”) to reexamine certain of its guidance within 180 days of the order to evaluate the fiduciary duties under the Employee Retirement Income Security Act (“ERISA”) with respect to making available to plan participants an allocation fund that includes investments in alternative assets (private market investments, including direct and indirect interest in equity, debt, other financial instruments that are not publicly traded on an exchange, and other financial instruments), direct or indirect interests in real estate, actively managed investment vehicles investing in digital assets, direct and indirect investments in commodities, direct and indirect interests in projects financing infrastructures development, and lifetime income investment strategies. At this time, the law has not changed, and retirement plan fiduciaries should continue to follow their fiduciary processes and document their prudent steps.
Within 180 days (by February 3, 2026), the DOL is to issue guidance on alternative assets and the appropriate fiduciary process associated with offering the alternative assets under a plan subject to ERISA as an alternative investment. Retirement plan fiduciaries need to watch for the guidance to be issued in this area and determine if, when, and how the fiduciary’s procedures may be impacted.
