On July 4, 2025, President Donald Trump signed the budget reconciliation legislation (H.R.1) into law. After weeks of negotiation, House and Senate leaders met their self-imposed deadline for enacting a budget reconciliation package that extends the 2017 tax cuts and enacts many other parts of President Trump’s agenda.
The budget reconciliation act — generally referred to as the One Big Beautiful Bill, although that title is no longer officially included in the statutory language — is a sweeping legislative package that includes a broad range of tax-related provisions along with benefits and compensation provisions that:
- Make changes affecting health savings account (HSA) eligibility, including changes addressing telehealth coverage, direct primary care (DPC) arrangements, and the treatment of bronze and catastrophic coverage available on the Affordable Care Act (ACA) marketplaces
- Permanently extend the exclusion for employer-provided student loan repayment assistance
- Permanently extend and modify the employer tax credit for paid family and medical leave
- Modify the employer tax credit for employer-provided childcare expenses
- Increase the annual limit for dependent care flexible spending accounts (FSAs)
- Establish an aggregation rule to determine application of the $1 million limit on the employer’s deduction for compensation paid to certain individuals
In addition, the act permanently extends (and, in some cases, modifies) expiring provisions of the 2017 Tax Cuts and Jobs Act, such as the individual tax rates, child tax credit, alternative minimum tax, itemized deductions and other provisions. It also establishes new, temporary tax deductions for tip and overtime income and for seniors 65 and older. Other provisions set new requirements for Medicaid, the ACA and Medicare.
Healthcare provisions
HSA provisions
- High-deductible health plan (HDHP) telehealth safe harbor: The act reinstates and permanently extends the HDHP telehealth safe harbor for plan years beginning after December 31, 2024. Under the safe harbor, telehealth and remote healthcare services are not considered disqualifying coverage for purposes of HSA eligibility. The safe harbor had expired for plan years beginning after December 31, 2024. The retroactive effect of the reinstatement and permanent extension of the safe harbor provide ongoing certainty for plan sponsors about the treatment of telehealth arrangements offered to their HDHP participants.
- DPC arrangements: Eligible DPC arrangements will not be considered disqualifying coverage for purposes of HSA eligibility, and fees paid for eligible DPC arrangements will be considered qualified distributions from HSAs. Eligible DPC arrangements are arrangements that provide solely for primary care services provided by primary care practitioners in which the sole compensation is a fixed periodic fee. Primary care services do not include procedures that require the use of general anesthesia, prescription drugs (other than vaccines) or laboratory services that are not typically administered in an ambulatory primary care setting. The aggregate fee for all DPC arrangements cannot exceed $150 per month ($300 per month for arrangements that cover more than one individual). These limits will be indexed for inflation. The provision takes effect for months beginning after December 31, 2025.
- ACA bronze and catastrophic plans: Bronze and catastrophic plans that are available on the individual ACA marketplaces will be treated as HSA-eligible HDHPs for months beginning after December 31, 2025.
A version of the legislation approved by the House on May 22 included other HSA provisions, which were not included in the final bill and were not signed into law. Those provisions would have: addressed HSA eligibility in connection with Medicare Part A, onsite employer clinics and spousal FSAs; increased HSA contributions for some taxpayers; allowed spouses to make catch-up contributions to the same HSA; allowed unused funds in health FSAs and health reimbursement arrangements (HRAs) to be rolled into HSAs; allowed personal fitness expenditures; and allowed reimbursement of certain expenses incurred before the HSA was established. The earlier House legislation also included provisions to codify and improve individual coverage HRAs.
ACA provisions
The act limits eligibility for premium tax credits to U.S. citizens, lawful permanent residents and certain specified groups of other immigrants. It also enhances eligibility verification, requires full recapture of excess advanced premium tax credits and makes other changes.
Other benefit-related provisions
- Educational assistance: The act permanently extends the exclusion for employer-provided student loan repayment assistance under Internal Revenue Code (IRC) section 127. The exclusion had been scheduled to sunset for payments made after December 31, 2025. In addition, the $5,250 limit on qualified educational assistance will index annually for inflation after 2026.
- Dependent care FSA limit: The annual limit for dependent care FSAs will increase to $7,500 for taxable years beginning after December 31, 2025.
- Employer tax credit for paid family and medical leave: The act permanently extends the employer tax credit for paid family and medical leave. The tax credit had been scheduled to sunset on December 31, 2025. The act also provides that employers using insurance to provide paid family and medical leave may claim the credit. Employers could treat employees as eligible employees for purposes of the tax credit if they have worked for the employer for at least six months. The provisions are effective for taxable years beginning after December 31, 2025.
- Tax credit for employer-provided childcare: The tax credit for employer-provided childcare will increase to 40% of allowable expenses, and the maximum credit will be $500,000 annually (50% of qualified expenditures to a maximum of $600,000 for eligible small businesses, which are defined based on gross receipts rather than the number of employees). The act makes other modifications to eligibility for the credit. The provisions are effective for taxable years beginning after December 31, 2025.
- Exclusion for bicycle commuting: The act permanently repeals the tax exclusion for qualified bicycle commuting expenses. The provision is effective for taxable years beginning after December 31, 2025, but the Tax Cuts and Jobs Act suspended the exclusion for taxable years beginning after December 31, 2017, and before January 1, 2026.
- Exclusion for qualified moving expenses: The income exclusion for qualified moving expenses is slightly expanded. The exclusion will apply to both those on active military duty and members of the intelligence community. Currently, the exclusion applies only to those on active military duty.
Executive and other compensation provisions
- Section 162(m) deduction: The act imposes an aggregation requirement on amounts paid by members of a controlled group to a specified covered employee for purposes of the $1 million deduction limit under section 162(m). Under the provision, if the aggregate amount of applicable remuneration paid by all members of a controlled group with respect to the specified covered employee exceeds $1 million, the deduction for the entire controlled group will be limited to $1 million, and the deduction will be allocated proportionally among the controlled group members that paid compensation to the covered individual. The provision takes effect for taxable years beginning after December 31, 2025.
- Excise tax on tax-exempt employers for compensation over $1 million: The 21% excise tax on excessive compensation will apply to all employees and former employees of the tax-exempt employer. The provision is effective for taxable years beginning after December 31, 2025.
Other tax provisions
- Extension and modification of expiring tax provisions: In general, the act extends (and, in some cases, modifies) tax provisions that were scheduled to sunset on December 31, 2025. Extended provisions include individual tax rates, increased standard deduction, enhanced child tax credit, increased exemption amounts for the alternative minimum tax and more.
- Temporary deductions for tips, overtime and seniors: The act provides temporary, income phased-out deductions for tips, for overtime compensation, and for individuals who are age 65 and older.
- Trump accounts: The act establishes new Trump accounts, which generally could be established for children under age 18. Trump accounts are modeled on IRAs but are subject to investment restrictions and will allow distributions for any reason after the child attains age 18. The act also establishes a pilot project under which children born during years 2025 through 2028 would receive a one-time $1,000 credit to the account from the federal government.
- ABLE accounts: The act will make the 2017 increases to the contribution limit for ABLE accounts permanent and adjust how inflation increases are calculated. In addition, the act permanently extends provisions that make ABLE account contributions eligible for the saver’s tax credit and that allow amounts from section 529 plans to be rolled over into an ABLE account.
The act also includes provisions affecting the taxation of foreign corporate income, increasing the federal debt ceiling and many other provisions.
It is also worth noting that the act does not include proposals put forth by the American Benefits Council that would have expanded the use of surplus pension and 401(h) assets.
Going forward
The provisions of the budget reconciliation act are now law, with varying effective dates. Employers should review the changes with advisors and legal counsel to determine whether they need to make changes to comply with new requirements or whether they wish to adopt provisions that are extended or created under the act.
