Focus on Employer Impact: The One Big Beautiful Bill Act

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 employers, including provisions that:

• Increase the maximum annual limit for dependent care flexible spending accounts (FSAs);

• Permanently extend the telehealth exception for high deductible health plans (HDHPs);

• Allow employee access to Direct Primary Care arrangements without causing a loss of HSA eligibility;

• Permanently allows employers to take a credit for their paid family and medical leave (PFML) expenditures;

• Allow employers to help pay employees’ student loans beyond 2025 and make cost-of-living adjustments to the tax exclusion for educational assistance programs;

• Allow employers to contribute up to $2,500 per year to a new type of tax-advantaged account for children, called Trump Accounts; and

• Allow certain workers an above-the-line deduction for “qualified overtime compensation.”

The following provides a broad overview of employment-related provisions from the OBBB Act and corresponding action items for employers to review. These items are not meant to be comprehensive and cannot account for the entirety of the legislation.

One Big Beautiful Bill Act Increases Dependent Care FSA Limit

Currently, the annual contribution limit for dependent care FSAs is $5,000 for single individuals and married couples filing jointly and $2,500 for married individuals filing separately. This limit has been in place since 1986 (except for a temporary increase during the COVID-19 pandemic).

• Effective Jan. 1, 2026, the OBBB Act increases the Dependent Care FSA limit to $7,500 for single individuals and married couples filing jointly and $3,750 for married individuals filing separately.

  
  

• This increase is optional for plans to adopt.

Dependent Care FSA Limit Increase Action Items

✓ Assess how the increased limit may impact the plan’s annual nondiscrimination testing results, particularly the 55% average benefits test.

✓ Review the written plan document to determine if updates are necessary due to the increased limit.

✓ Communicate the new limit to employees as part of the open enrollment process.

One Big Beautiful Bill Act Permanently Extended Pre-deductible Telehealth Coverage for HDHPs/HSAs

The OBBB Act includes measures to expand the use of health savings accounts (HSAs). One of the new measures 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.

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.

However, in response to the COVID-19 pandemic, the U.S. Congress enacted legislation that temporarily allowed HDHPs to provide benefits for telehealth or other remote care services before plan deductibles were met. This exception for first-dollar telehealth services expired at the end of the 2024 plan year (i.e., Dec. 31, 2024, for calendar-year HDHPs). However, the OBBB Act permanently extends this relief, retroactively effective for plan years beginning on or after Jan. 1, 2025.

• Due to the permanent extension, HDHPs may waive the deductible for any telehealth or other remote care services for plan years beginning in 2025 and beyond without causing participants to lose HSA eligibility.

  
  

• This provision is optional; HDHPs may still apply any telehealth services, other than preventive care, toward the deductible.

First Dollar Telehealth Coverage Action Items

✓ Employers with HDHPs should review their health plan’s coverage of telehealth services to determine if changes should be made.

✓ Determine whether to make changes effective in 2025 or beginning in 2026.

✓ For changes made in 2025, communicate any changes to telehealth coverage to plan participants through updated plan materials or a Summary of Material Modifications.

One Big Beautiful Bill Act Allows for Direct Primary Care Participation without a Loss of HSA Eligibility

Direct Primary Care (DPC) arrangements are subscription-based health care models for delivering primary care to patients. Each patient pays a membership fee and may utilize various primary care services from a DPC provider.  Historically, it has been unclear how access to DPC services impacted an individual’s eligibility to contribute to an HSA.  In fact, most assumed that accessing DPC before meeting an insurance plan deductible rendered an individual ineligible to make HSA contributions.  Beginning in 2026, participation in DPC arrangements that meet the following criteria will not cause a loss of HSA eligibility:

• The DPC must be subject solely to a fixed monthly fee of no more than $150 for an individual and $300 for more than one individual (these amounts may increase annually for inflation); and

• The DPC must involve medical care provided by a primary care practitioner.  Procedures that require the use of general anesthesia, prescription drugs (other than vaccines) and lab services not typically provided in a primary care setting do not qualify as primary care.

In addition, fees paid for such DPC arrangements will be treated as eligible medical expenses for purposes of HSA reimbursement.

DPC Participation Action Items

✓ Employers who have encouraged DPC participation in the past will now be able to do so with confidence if also offering a High Deductible Health Plan with HSAs.  

✓ Employers should work with their benefits advisors to determine if the DPC arrangements meet the criteria and communicate accordingly to employees.

One Big Beautiful Bill Act Expands and Makes Permanent Employer Tax Credit for PFML

The OBBB Act affected a tax code provision that allows employers to take a credit for their paid family medical leave (PFML) expenditures. In brief, the OBBB Act 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.

• The tax credit is only available to employers voluntarily providing at least two weeks of PFML at a rate that is at least 50% of the employee’s normal pay rate.

  
  

• The credit does not apply to PFML required by law, nor does it apply to vacation leave, personal leave or sick leave.

PFML Tax Credit Action Items

Employers that voluntarily provide PFML should review their leave policies and speak with their tax advisor to determine whether they qualify for this potentially valuable tax credit.

One Big Beautiful Bill Act Makes Student Loan Repayment Benefit Permanent

Since 2020, employers that offer educational assistance programs have been able to use them to help pay for their employees’ student loans. While educational assistance programs have been available for many years to pay expenses such as books, equipment, supplies, fees and tuition, the option to use them to pay for student loans was set to expire on Dec. 31, 2025. However, the OBBB Act permanently extends this student loan provision.

In most cases, educational benefits are excluded from federal income tax withholding, Social Security tax, Medicare tax and federal employment (or FUTA) tax. Under current law, tax-free benefits under an educational assistance program are limited to $5,250 per employee per year, and assistance provided above this level is typically taxable as wages. Effective for taxable years beginning after 2026, the OBBB Act provides for annual inflation adjustments to the $5,250 limit.

Student Loan Repayment Benefit Action Items

✓ Employers may continue to use educational assistance programs to pay principal and interest on an employee’s qualified education loans.  Payments made directly to the lender, as well as those made to the employee, may qualify. 

✓ Communicate the new limit to employees as part of the open enrollment process.

One Big Beautiful Bill Act Creates New Tax-favored Accounts for Children

The OBBB Act creates a new type of federal tax-favored account for children, called Trump Accounts, effective for tax years beginning in 2026.

Employers that establish a Trump Account Contribution Program can contribute up to $2,500 per year on a tax-free basis to the Trump Accounts of employees’ dependents (or teenage employees). This program must be established pursuant to a written plan document and must meet certain tax rules that apply to dependent care assistance programs. Key features of Trump Accounts include the following:

• Children born in 2025-28 may be eligible to receive a special $1,000 contribution from the federal government;

• Annual contributions are generally limited to $5,000 and may only be made beginning 12 months after the OBBB Act’s enactment (i.e., July 4, 2026) and only until the child reaches age 18;

• The accounts are treated similarly to traditional individual retirement accounts for tax purposes, although taxpayers’ contributions are not tax deductible; and

• Withdrawals are only permitted after the account beneficiary reaches age 18.

Trump Account Action Items

✓ The IRS is expected to issue guidance on Trump Accounts in the future, which should address eligibility criteria, plan document requirements, implementation timelines and administration details.   

✓ Employers should consider whether implementing a Trump Account will be beneficial and cost-effective.  Those interested should watch for further guidance from the IRS.

One Big Beautiful Bill Act Temporarily Eliminates Taxes on Overtime Compensation

The OBBB Act will allow certain workers an above-the-line deduction for “qualified overtime compensation” for taxable years beginning after Dec. 31, 2024, and ending for taxable years beginning after Dec. 31, 2028.  Section 70202 of the OBBB Act establishes a new above-the-line tax deduction for qualified overtime compensation.

• The OBBB Act defines “qualified overtime compensation” as overtime compensation paid to an individual required under Section 7 of the Fair Labor Standards Act 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.

• 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 Compensation Action Items

✓ Employers should work with their payroll provider and tax advisor to adjust their payroll systems to accurately tract and reporting overtime compensation on employees’ Forms W-2.

Many of these new provisions provide additional opportunities for employers to engage their employees and provide more meaningful employee benefits. We encourage you to contact your Cottingham & Butler team member today to learn more about how these changes may affect your benefit offerings.