The OBBB's Impact on Employee Benefits and Executive Compensation:
What Employers Need to Know
The One Big Beautiful Bill (OBBB), signed into law on July 4, 2025, delivers significant updates to employee benefits. Most notably, it expands HSA eligibility, increases dependent care FSA limits (finally!), makes permanent student loan repayment assistance, solidifies paid family and medical leave employer tax credits, includes updates for measuring executive compensation taxable caps, and introduces employer contributions to “Trump Accounts” (i.e., investment accounts for children). Below is a breakdown of these updates that could significantly affect how employers offer employee benefits in the years ahead.
HSA Expansions:
- Telehealth: The OBBB makes permanent COVID-era relief allowing HDHPs to provide first-dollar telehealth and other remote care services while maintaining HSA eligibility. This relief was no longer in place for plan years beginning in 2025, but the OBBB made the relief retroactive to December 31, 2024.
- Direct Primary Care (“DPC”) is Not HSA-Disqualifying: As of January 1, 2026, direct primary care arrangements are excluded from being a form of disqualifying coverage for HSAs. DPC fees (not exceeding $150/month (individual) and $300/month (family)) will also be allowed as a medical expense to be paid from an HSA.
- Bronze and Catastrophic Plans are HDHPs: These individual plans offered through the Exchange will automatically be treated as an HDHP, opening up access to HSAs starting in 2026.
Dependent Care FSA Increase:
After nearly forty years, the dependent care FSA limit increases—from $5,000 to $7,500 ($3,750 for married couples filing separately). While this change does not keep pace with inflation, it is a welcome one for employers who offer dependent care FSAs and employees (including this author!) who take advantage of such benefits. The increase is effective for taxable years beginning after December 31, 2025.
Student Loan Repayment Assistance:
Employers can now permanently offer tax-free student loan repayment assistance under a §127 qualified educational assistance program. The OBBB indexes the current $5,250 qualified educational assistance limit—which includes student loan repayment assistance—starting in 2026.
Paid Family and Medical Leave Credit:
The OBBB makes the employer tax credit for paid family and medical leave permanent, removing its prior expiration date of 2025. It also broadens the credit by allowing employers to claim it based on a percentage of premiums paid for insurance policies that offer qualifying paid leave. The minimum employee service requirement is reduced from one year to six months.
OBBB Trump Accounts:
Trump Accounts are investment accounts for children under the age of 18 with an annual contribution limit of $5,000 per child. Employers will be able to contribute up to $2,500 per year, indexed, on a tax-free basis. Employers offering this benefit will need a written plan document that complies with nondiscrimination rules. These contributions are effective beginning January 1, 2026, for taxable years starting on or after that date.
Executive Compensation Rule Update:
Effective January 1, 2026, the aggregation rule will require that all entities within a controlled group or affiliated service group be considered as a single employer when calculating the $1 million deduction cap for executive compensation. In practice, this means if any member of a controlled group pays a covered executive, the total covered remuneration paid by all group members to that executive is aggregated to determine what portion exceeds $1 million and is nondeductible. The $1 million “deductible” portion is prorated among group members based on the share of compensation each entity paid. In short, the entire controlled or affiliated service group now shares one $1 million deduction limit per covered employee, closing any prior loophole where related entities could each claim separate $1 million deductions in paying the same executive.
Expansion of Excise Tax under §4960:
Also effective January 1, 2026, the 21% excise tax under IRC §4960 will apply to any employee of a tax-exempt organization who earns over $1 million in total compensation or receives excessive parachute payments. This expansion removes the previous limitation to only the top five highest-paid executives, significantly broadening the scope of employees subject to the excise tax.
What Didn’t Make the Cut:
While the OBBB includes several long-awaited updates, many sought-after changes did not make it into the final legislation (e.g., ICHRA reform, HSA eligibility for Medicare Part A, allowing HSAs for individuals with spouses enrolled in a health FSA, HSA eligibility for on-site clinics). However, the changes that failed to make the cut may resurface in future legislation—especially as bipartisan interest in modernizing employee benefits continues to grow.
McGrath North attorneys are available to assist employers in navigating these developments—from reshaping benefit strategies for 2026 and beyond to drafting plan documents and amendments. We are here to help ensure your benefits remain compliant, effective, and competitive.
For tax-related updates under the OBB, check out our Tax Group’s article here: https://www.mcgrathnorth.com/key-tax-changes-in-the-one-big-beautiful-bill-act
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