By ESOPs, Benefits & Compensation

On behalf of the K&C ESOPs, Benefits & Compensation team, welcome to summer! In an interesting turn of events, major legislation that we typically see toward the end of the year landed on the Fourth of July in the form of the “One Big Beautiful Bill” (or the “OBBB”).
 
While the OBBB addresses an enormously wide range of issues, it also makes some important employee benefits changes. The OBBB changes are largely focused on employer-based health insurance and fringe benefits, and don’t include major retirement-plan updates like the SECURE Act and SECURE 2.0.
 
We’ve outlined here the items that we believe employers are most likely to encounter; many other provisions will affect employees’ personal health insurance coverage, finances, or other areas that may indirectly interact with employers’ benefits offerings. As always, feel free to contact a team member with any questions about these or any other terms of the new law.
 
Permanent HSA Telehealth Relief
 
Prior Law
 
Before COVID, high-deductible health plans generally were not allowed to provide pre-deductible telehealth coverage (sometimes called “first-dollar” coverage) without jeopardizing their employees’ ability to contribute to an HSA. During COVID, temporary relief was offered, allowing pre-deductible, non-preventive telehealth services to be covered without adversely affecting employees’ HSA eligibility. However, despite intense efforts by industry organizations at the end of 2024, a permanent change was not adopted, leaving the temporary relief to expire at the end of 2024. With the lapse of relief, some workarounds included charging employees a market-rate fee for pre-deductible telehealth services, limiting pre-deductible telehealth services to preventive care, or restricting all pre-deductible telehealth services.
 
New Law
 
The OBBB makes the prior relief permanent, allowing an employer-based high-deductible health plan to provide pre-deductible telehealth services while still allowing employees to make HSA contributions. The change is retroactive to January 1, 2025.

New HSA Direct Primary Care Relief
 
Prior Law
 
Much like the pre-deductible telehealth coverage discussed above, direct primary care (or “DPC”) models generally were also considered to disqualify an employee from HSA eligibility. Direct primary care traditionally involves payment of a fixed fee to a DPC provider that covers routine items like office visits, chronic condition management, consultations, and other office-based services. Where an employee had high-deductible health coverage, the DPC fee-for-service model usually was considered other pre-deductible coverage that disqualified the employee from contributing to an HSA.
 
New Law
 
The OBBB for the first time addresses the interaction of direct primary care coverage and HSA eligibility. Like the permanent telehealth relief, the OBBB provides that DPC coverage will not disqualify an employee from HSA eligibility as long as the DPC fees do not exceed $150 per month for an individual or $300 per month for a family (both as indexed for future inflation). Additionally, the OBBB goes a step further, now allowing the DPC fixed fee to be paid from an HSA as a qualified medical expense. This change takes effect in 2026.
 
Dependent Care FSA Limit Increased to $7,500
 
Prior Law
 
For many years, dependent care FSA contributions have been capped at $5,000 per year (again, with some temporary relief during COVID). Because the original $5,000 limit was not indexed to inflation, the contribution limit has slipped well below its originally intended benefit level.
 
New Law
 
The OBBB increases the dependent care FSA contribution limit to $7,500. The new limit is also not indexed for future inflation, however. The new limit is effective in 2026.
 
Tax-Free Employer Student Loan Repayments Made Permanent
 
Prior Law
 
Prior to COVID, employers were able to pay or reimburse employees tax-free for up to $5,250 per year in educational expenses; this did not include repayment of student loans. Another COVID-era exception allowed employers to repay employees’ student loans on a tax-free basis, but it too was temporary, expiring at the end of 2025.
 
New Law
 
The OBBB makes this change permanent, allowing employers to repay or reimburse employees’ qualifying student loan payments tax-free. The new law also starts indexing the $5,250 limit, which has remained static for many years.
 
Tax-Free Employer Contributions to Newly Created “Trump Accounts”
 
Prior Law
 
Although the concepts borrow very heavily from existing IRA and FSA rules, there is no prior law.
 
New Law
 
The OBBB creates “Trump accounts” that are essentially traditional IRAs that can be funded for minor children up to $5,000 per year. Like traditional IRAs, the funds are invested and can grow tax-free but are not allowed to be distributed before the year the account beneficiary turns 18. While there are additional rules on funding, investments, and other account details, the OBBB also allows employers to contribute up to $2,500 (indexed) to the Trump account of an employee or the child of an employee. These employer contributions are tax-free to the employee in the year they are contributed (although they will ultimately be taxed when the employee or child withdraws the money from their Trump account). The employer contributions must be made pursuant to a written plan document and must follow certain FSA-based non-discrimination rules. These rules will apply in 2026.
 
Moving Expense Deduction Permanently Limited
 
Prior Law
 
Before the Tax Cuts and Jobs Act of 2017, amounts that employers paid or reimbursed to employees for job-related moving expenses were not taxable to the employee. Starting in 2018, only members of the U.S Armed Forces qualified for this benefit, but the limitation was set to expire at the end of 2025 so all employees would again qualify beginning in 2026. In other words, since 2018, non-Armed Forces employees who receive employer-paid moving expenses are subject to income tax, FICA tax, and tax withholdings on those amounts.
 
New Law
 
The OBBB makes the limitation permanent but keeps the exception for members of the U.S Armed Forces and adds a new exception for certain members of the U.S. intelligence community. This means all other employees will continue to be taxed on employer-paid moving expenses or reimbursements.
 
Expansion of Excise Tax on Highly Paid Employees of Tax-Exempt Employers
 
Prior Law
 
Also starting with the Tax Cuts and Jobs Act of 2017, most tax-exempt employers became subject to a 21% excise tax on compensation paid to employees over $1 million in a given year. Originally, the excise tax only applied to certain “covered employees” who were (either in the year at issue or any prior year) one of the tax-exempt employer’s five highest paid employees.
 
New Law
 
The OBBB expands the group of covered employees so that it now includes any employee or former employee who earns over $1 million in a year.

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2025.