On July 4, 2025 President Trump signed into law The One, Big, Beautiful Bill Act (the “Act”), which contains key employee benefit changes relating to fringe benefits, executive compensation and health and welfare plan benefits as outlined below.
Educational Assistance Programs – Student Loan Assistance Made Permanent
An Educational Assistance Program under Internal Revenue Code (Code) Section 127 permits employers to provide employees with tax-free educational assistance up to a maximum of $5,250 annually. Section 2206 of the CARES Act amended Code Section 127 and expanded the educational assistance permitted to include employer-provided assistance relating to an employee’s student loans. This expansion under Code Section 127 was limited for educational assistance provided in tax years before January 1, 2026.
For tax years after December 31, 2025, the Act makes student loan assistance a permanent educational assistance benefit under Code Section 127 by removing the sunset date of January 1, 2026. Furthermore, the Act provides that the maximum benefit under an Educational Assistance Program, currently $5,250, will be adjusted for inflation for tax years beginning after 2026.
$1 Million Code Section 162(m) Limit – Expanded to Include Controlled Group
Under Code Section 162(m), public company employers may not deduct more than $1 million for the compensation their “covered employee” receives in a tax year. Covered employees include:
Employees that serve as the principal executive officer or principal financial officer of the corporation (or act in such capacity) during the taxable year
Employees whose total compensation is required to be reported to shareholders under the Exchange Act (or would be required to be reported, if such reporting were required) due to being among the corporation’s three most highly compensated officers for the taxable year (other than the principal executive officer or principal financial officer)
Any employee who was considered a covered employee under category (1) or (2) for any prior taxable year beginning after December 31, 2016
For taxable years beginning after December 31, 2026, the definition of “covered employees” is expanded to include the next five most highly compensated employees for the taxable year (other than the principal executive officer, principal financial officer and the three most highly compensated officers)
As currently written, Section 162(m) applies to publicly-held corporations on an individual company basis (i.e., applied separately to each member of a controlled group). The Act adds an aggregation rule to Section 162(m), under which all members of a publicly held corporation’s “controlled group” (i.e. a group of related employers that are treated as a single employer for employee benefits purposes) are treated as a single employer for purposes of the $1 million deduction limitation.
Under the Act, employees that are treated as covered employees with respect to a wider controlled group (specified covered employees) generally include all covered employees as described above in categories (1), (2) and (3) with respect to the publicly-held corporation, which is a member of the controlled group. However, for purposes of determining whether an employee is one of the next five most highly compensated employees with respect to the above-described category (4) is to be determined with respect to the entire controlled group, not just the publicly-held entity that is a member of such controlled group. Under the Act, if a specified covered employee with compensation above $1 million is paid such compensation by more than one entity within the controlled group, the $1 million allowable deduction amount is to be applied among such entities on a pro rata basis with respect to the percentage of the aggregate compensation paid by each such entity.
Health Savings Accounts (HSAs)– Expanded to Include Bronze and Catastrophic Plans
HSA Background
HSAs are individual accounts that hold tax-advantaged funds that can be used to pay for qualified medical expenses of the account holders and their families. The account owner’s contributions to an HSA are tax deductible or, if made through payroll deductions, deducted on a pre-tax basis. Further, HSA contributions made on behalf of an individual by the individual’s employer are excluded from the employee’s income and employment taxes. In addition, distributions used for qualified medical expenses are not included in income.1 Earnings on contributions grow tax-free, and unused funds can remain in an HSA account from year-to-year – allowing the accumulation of tax-free savings for future medical expenses. Annual contributions to an HSA are subject to statutory limits, but are generally annually adjusted for inflation each tax year.
To be eligible to contribute to an HSA individuals must be covered by a high deductible health plan (HDHP) that meets specified requirements and may not be covered by any other health plan, unless the plan provides health coverage that falls within limited exceptions. The HDHP may provide preventative care coverage before the minimum deductible is reached.
HSA Enhancements under the Act
Effective for tax years after December 31, 2025, the Act permits bronze and catastrophic plans offered in the individual market as HDHPs and may be utilized with HSAs. Bronze plans have the highest cost-sharing of individual market plans. Catastrophic plans have deductibles equal to the annual limit on out-of-pocket costs under the Affordable Care Act.
Under current law direct primary care service arrangements, which typically offer unlimited primary care services to patients for a periodic fee, may be treated as health plans that may disqualify individuals from making contributions to an HSA. Effective for tax years after December 31, 2025, individuals who participate in a direct primary care service arrangement will continue to be eligible to utilize and contribute to an HSA if: (a) the periodic fee does not exceed $150 per month (or $300 per month if more than one person is covered) and (b) the primary care services provided do not include (i) services requiring general anesthesia, (ii) prescription drugs (except for vaccines) or (iii) laboratory services not typically administered in an ambulatory primary care setting. In addition, fees paid for a direct primary care service arrangement will be treated as medical expenses that can be paid for with funds from an HSA.
Further, the Act makes permanent the telehealth HDHP safe harbor that allowed HDHPs to provide telehealth or other remote healthcare services with no (or a lower) deductible. Under this safe harbor, which had expired on December 31, 2024, these services were not considered disqualifying coverage for purposes of HSA eligibility.
Dependent Care Flexible Spending Account – Limited Increased
Under Code Section 129 employers may provide employees with the opportunity to contribute their wages to a dependent care flexible spending arrangement on a pre-tax basis for any dependent care assistance incurred throughout the tax year. The maximum contribution limit has been capped for quite some time at $5,000 for married individuals, and $2,500 for a single individual or a separate return filed by a married individual. For tax years after December 31, 2025, the limits increase to $7,500 and $3,750, respectively.
Please reach out to your contact at the firm, or the authors below to receive additional information on this employee benefit plan update.
1. Distributions that are not used for qualified medical expenses are, generally, includible in income and subject to a 20 percent additional excise tax. In most cases,
health insurance premiums are not treated as qualified medical expenses.
