Summary
H.R.1—the One Big Beautiful Bill Act (OBBBA)—contains several provisions that directly affect employer-provided benefit programs, primarily health and welfare programs.
The Upshot
The new budget law’s changes to health and welfare benefits include:
- Beginning in 2026, the amount that employees may contribute to their dependent care flexible spending accounts will increase to $7,500 ($3,750 for married individuals filing separately).
- Telehealth services may again be covered under a health plan without affecting an individual’s ability to make or receive contributions to a health savings account. This extension of an expired provision in the Internal Revenue Code (Code) is permanent and retroactive, so it is as if it never went away.
- The OBBBA makes clear that, beginning in 2026, individuals are not precluded from contributing to an HSA simply because they participate in a primary care service arrangement.
- Employers may also continue to pay or reimburse employees tax-free for up to $5,250 each year for student loans (and other qualifying education expenses) under a Code Section 127 educational assistance program. Beginning in 2027, the dollar cap on Code Section 127 educational assistance programs will be indexed for inflation.
Beginning with tax years starting after 2026, the OBBBA also changed the method used to determine the amount of compensation paid to certain employees of publicly traded companies (known as “covered employees”) for purposes of applying the deductibility limit under Section 162 of the Code. Under the new rule, compensation paid by the members of the employer’s controlled group must be included when determining how much compensation paid to an employee can be deducted by the employer and its affiliates.
The Bottom Line
Employers and plan participants will generally favor the changes to their health and welfare benefits, although employers may also need to consider the indirect impact of certain other OBBBA changes, in particular, cuts to the Medicaid program. Publicly traded employers will need to apply the new rules on deduction of compensation paid to employees who are “covered employees” under Section 162 of the Code.
H.R.1—the One Big Beautiful Bill Act (OBBBA)—signed into law by President Trump on July 4, 2025, contains several provisions directly affecting employer-provided benefits. Most of these changes pertain to individual account plans, including dependent care flexible spending accounts (dependent care FSAs) and health savings accounts (HSAs).
Health- and Welfare-Related Spending Accounts
Dependent Care FSAs
Dependent care FSAs permit employees to pay for certain dependent care expenses with pre-tax dollars.Effective January 1, 2026, the annual contribution limit for dependent care FSAs will increase from $5,000 to $7,500 ($2,500 to $3,750 for married individuals filing separately). As with the original limitations, these new limits are not subject to a cost-of-living adjustment, so they will remain fixed until changed again by Congress.
HSAs
Background
Like dependent care FSAs, HSAs permit employees to pay certain expenses with pre-tax dollars. HSA dollars are used to pay for health care expenses. For employees to make or receive pre-tax HSA contributions, they must generally participate in a high deductible health plan (HDHP) and no other health plan. An HDHP generally provides coverage for medical care expenses only after an individual meets a required deductible, with an exception for certain recognized preventative care expenses.
Telehealth Coverage
Tax-favored contributions to an HSA are once again permitted for individuals who have coverage for telehealth services prior to satisfying the deductible under their HDHP.
Legislation passed during the pandemic let HDHPs provide first-dollar coverage for telehealth services even if the reason for the medical service was not preventative. However, Congress allowed this temporary exception to lapse at the end of 2024. The OBBBA makes the telehealth exception permanent.
This change is retroactive to January 1, 2025, so there is no gap in application of the telehealth exception.
Direct Primary Care Coverage
Effective January 1, 2026, the OBBBA makes clear that individuals can contribute to an HSA even if they participate in a direct primary care service arrangement (DPC).
DPCs are health care arrangements where an individual pays a monthly (or other periodic) fee in exchange for primary care services that are not limited to preventative care. For example, an individual may pay a monthly fee of $150 for services offered by a primary care physician. The services covered by a DPC are limited and cannot include general anesthesia, prescription drugs (other than vaccines), and certain lab services. The monthly fee may not exceed $150 for an individual and $300 for a family. These limits will be adjusted for inflation.
Other Welfare Benefit Programs
Education-Related Expenses
Employers may continue to pay for or reimburse an employee’s student loans on a tax-free basis each year through an education assistance program pursuant to Section 127 of the Internal Revenue Code (Code). Reimbursement for these loans was set to expire at the end of 2025. The total amount of educational assistance, including student loans, is limited to $5,250 per year, but under the OBBBA, this amount will increase with inflation, beginning with tax years after December 31, 2026.
Bicycle Commuting Reimbursement Permanently Repealed
The OBBBA permanently repealed the $20 per month tax-free bicycle commuting reimbursement benefit.
The bicycle commuting reimbursement benefit was added by legislation in 2009. Other legislation temporarily repealed the law from 2018 through 2025. Absent legislation, the bicycle commuting reimbursement benefit would have spun back into effect in 2026. However, the OBBBA ensured this benefit is permanently parked and out of commission.
Executive Compensation
Background
Section 162(m) of the Code limits the amount of compensation paid to certain employees, known as “covered employees,” which public companies can deduct up to $1 million. Recent legislation modified the definition of “covered employees” starting with tax years beginning in 2027 to include the chief executive officer (CEO), chief financial officer (CFO), and the next eight highly paid employees (for years before 2027, covered employees only included the CEO, CFO, and the next three highly paid employees). The same legislation added a rule that, once an employee is determined to be a covered employee, the individual will forever remain a covered employee, even after death.
Expansion of Disallowed Deduction
The OBBBA clarifies that, beginning in 2026, for purposes of calculating compensation paid to a covered employee, all compensation paid to the individual by members of the employer’s controlled group, including members of the controlled group that are not publicly traded, must be taken into account. The controlled group is determined in accordance with the same rules that apply to qualified retirement plans. The deduction limit on the amount of aggregated compensation that exceeds $1 million dollars is applied to each member of the controlled group in proportion to its percentage of the employee’s total compensation.
HSA Provisions That Are Not in the Final OBBBA
While the OBBBA included a couple of HSA-related provisions, several suggested by the House did not make it to the final version of the Act. These include:
- Allowing seniors on Medicare Part A to continue to qualify for HSA contributions;
- Permitting conversion of unused health reimbursement arrangement (HRA) and FSA funds into HSAs;
- Allowing tax-free HSA reimbursements for fitness and exercise programs costs up to $500 per individual annually ($1,000 per family);
- Increasing HSA contribution limits for individuals, with a phase-out for individuals earning more than $75,000 ($150,000 for families); and
- Permitting individuals with access to limited services through an on-site medical clinic to be HSA-eligible.
These changes may resurface in future legislation.
Provisions With Indirect Consequences
Other provisions in the OBBBA that are not specifically directed toward employer-provided benefits may nevertheless have a significant effect on those benefits. In particular, the cuts in Medicaid could result in transferred costs to employer-sponsored health plans and have other downstream consequences.
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