One Big Beautiful Bill is Chock Full of Benefits, Employment Law Changes

PDF

The U.S. House of Representatives passed the One Big Beautiful Bill Act (the “Act”) on July 3, 2025, which was signed into law by President Trump on July 4.  While such a broad piece of reconciliation legislation has had multiple iterations, including both substantive additions and subtractions along the way, the final version of the Act included several significant changes to federal wage and hour law, in addition to new or clarified employee benefits law changes, many of which take effect immediately.  The focus of this article is limited to the employment law and employee benefit implications of the Act.

Employment Law Changes

 No Tax on Tips.  As a plank in President Trump’s campaign platform, the “No Tax on Tips” provisions of the Act, which is effective for the 2025 tax year (but scheduled to expire in 2028 unless earlier reauthorized), will provide a deduction for “qualified tips” of up to $25,000 per year, provided the tip earner’s modified adjusted gross income (“MAGI”) remains at or below $150,000 ($300,000 for joint filers), at which point the deduction would be reduced by $100 for each $1,000 of MAGI earned over that threshold.  Tips may remain subject to taxation at the state level in accordance with state laws unaffected by the Act.

Before you rush to re-qualify your income as tips, you should know there are a few key provisions of the law that are intended to limit the tax benefit to individuals in occupations that are “customarily and regularly” tipped, and a few threshold requirements before your tips are “qualified” within the meaning of the Act.  First, in order to be eligible, you must have an occupation that is customarily and regularly tipped prior to December 31, 2024, and the Treasury Secretary has 90 days from enactment of the Act to publish a list of such occupations.  The Act expressly prohibits a deduction for tips if the tips were earned in professional occupations of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial or brokerage services, trades or businesses in which the wage earner primarily trades on the reputation or skill of the service provider, and investment related occupations like investment management, trading or dealing in securities or similar business interests.  Where the tip earner is engaged in performing the service personally, as a business owner and not as an employee, the tip deduction is further capped at the earner’s gross income from performing the service.

For the tips themselves to be “qualified,” they must be a voluntary payment without any consequence to the payor for nonpayment, not subject to a negotiation between the earner and payor, and determined exclusively by the payor.  Mandatory tips, such as service charges for large parties at restaurants, and other service fees or administrative charges, are not considered “qualified” tips.  The Act also specifies that the tips must be cash or cash-like, including tips paid by credit or debit cards and tips distributed through a qualified tip pool.  Non-monetary tips, such as gifts, jewelry, baskets, trips, and the like, will not qualify.  Finally, no provision of the Act changes the existing process for the reporting of tip income on a W-2 or IRS Form 4137, and in order to be a qualified tip under the Act, it must be reported to the IRS and eligible taxpayers must include their Social Security numbers on their tax returns.  Additional guidance for employers will be published by the Treasury Secretary.

No Tax on Overtime.  The “No Tax on Overtime” provisions of the Act, which is effective for the 2025 tax year (but scheduled to expire in 2028 unless earlier reauthorized), will provide a deduction for “qualified overtime compensation” of up to $12,500 per year ($25,000 for joint filers), provided the overtime earner’s modified adjusted gross income (“MAGI”) remains at or below $150,000 ($300,000 for joint filers), at which point the deduction would be reduced by $100 for each $1,000 of MAGI earned over that threshold.  Overtime may remain subject to taxation at the state level in accordance with state laws unaffected by the Act.

Only overtime compensation explicitly required under the federal Fair Labor Standards Act (“FLSA”) will qualify for the deduction.  Overtime paid voluntarily, whether as a bonus or otherwise, paid pursuant to a contract (such as a collective bargaining agreement), by policy (including shift differentials and the like), or pursuant to a state or local law requiring overtime greater than that required by the FLSA, is not eligible for the deduction.  The Act also specifies that a “qualified tip” may not also be claimed as “qualified overtime compensation.”

Like the deduction for “qualified tips,” the deduction for “qualified overtime compensation” requires accurate reporting on a W-2, which will compel employers to distinguish on the W-2 which overtime is qualified for the deduction.  The Act provides transitional guidance for 2025, allowing employers to “approximate” the “qualified overtime compensation” using a “reasonable method” that will be published by the Treasury Secretary.

Practical Wage and Hour Considerations for Employers.  Employers are likely to receive immediate questions from employees seeking the 2025 benefits of the Act, and some employers may consider changing their wage and hour strategies to enhance these benefits.  For employers with occupations eligible for tips, the 2025 benefits may result in employers more aggressively recommending tips to customers or considering ways to expand or enhance their qualified tip pools.  There is some debate that the “No Tax on Tips” provisions of the Act may even result in greater tax reporting of cash tips that previously may have gone unreported.  Other employers may be more aggressive in pushing voluntary or mandatory overtime for their FLSA non-exempt employes or even considering beneficial ways to expand eligibility for overtime deductions, including by revisiting salaried exempt FLSA classifications—particularly those that are close to the FLSA’s minimum salary level—to reclassify employees as non-exempt in an effort to provide more “qualified overtime compensation.”  In addition to these strategies, employers will also be grappling with the best way to ensure accurate payroll reporting of “qualified overtime compensation” on W-2s, which should become clearer upon the publication of guidance by the Treasury Secretary.

Employee Benefits Law Changes

Earlier versions of the Act included provisions that would have changed the tax incentives for certain retirement benefits, capped the exclusion from tax for some employer-provided health insurance benefits, protected qualifying HSAs when combined with the use of an employer on-site clinic, authorized HSA dollars to be used for gym memberships, further regulated pharmacy benefit managers (“PBMs”), and expanded Individual Coverage Health Reimbursement Arrangements into a more robust Custom Health Option and Individual Care Expense (“CHOICE”) program, but none of those provisions made it into the final version of the Act.  Still, the Act includes important changes to the law affecting Health Savings Accounts (“HSAs”), other employer provided fringe benefits.

Telehealth Safe Harbor.  After years of kicking the can down the road, the Act finally made permanent prior safe harbors temporarily granted to telehealth to allow the provision of such services on a cost-free basis without disqualifying employee HSAs.  Many employer-provided telehealth benefits are provided to employees on a cost-free or minimal cost basis that once created compliance problems for the employees who also participate in a high deductible health plan (“HDHP”) and HSA.  A cornerstone of the HDHP/HSA compliance framework is that all health care expenses are paid for by the employee at fair market value until such time as the employee has met the applicable deductible.  Providing telehealth on a cost-free or minimal cost basis was contrary to this compliance framework.  After seemingly discovering the efficiencies of telehealth during the COVID pandemic, Congress granted temporary relief that expired December 31, 2024.  The Act makes permanent that relief, retroactive to December 31, 2024, allowing HDHPs paired with HSAs to cover telehealth services pre-deductible without disqualifying the plan’s HSA eligibility.  As a result, employees with the HDHP/HSA framework are now authorized to receive cost-free or minimal cost telehealth services prior to satisfying their plan’s deductible.

Expansions of HDHPs.  Effective December 31, 2025, the Act also expands the definition of HDHP to include bronze plans and catastrophic plans offered in the individual market on an exchange.  While the expanded definition does not apply to employer-sponsored bronze plans and catastrophic plans, this provision of the Act is intended to broaden access to HSAs for individuals who obtain such policies through the exchange or the individual policy market.

Exchange Enrollment Changes.  In addition to other nuance changes to exchange special enrollment periods, effective December 31, 2027, passive enrollment or re-enrollment through the health insurance exchange is prohibited, and any individual’s eligibility for a premium tax credit must be determined by the exchange at the time of enrollment and in reliance on information provided by the individual.

Condition of Benefits on Immigration Status.  The Act also limits the availability of certain federal health-related benefits based on the individual’s immigration status.  Effective December 31, 2027, in order to receive premium tax credits for purchasing a policy through the exchange, an individual must have a lawful immigration status.  Effective December 31, 2025, individuals with a lawful immigration status and a household income less than 100% of the Federal Poverty Level who are ineligible for Medicaid due to their immigration status are also ineligible for premium tax credits when purchasing a policy through the exchange.

Employer Provided Fringe Benefits.  The following changes are effective for tax years beginning after December 31, 2025:

• Student Loans. The Act makes permanent the temporary provisions of the Tax Cuts and Jobs Act of 2017, which allowed employers to make tax free student loan reimbursement payments to employees up to $5,250 per year, the same as the existing tax-free tuition reimbursement provisions of federal law, and provides that going forward that cap will be adjusted annually for inflation.
• Moving Expenses. The Act eliminates the deduction and tax-free reimbursement for an employee’s qualified moving expenses.
• Paid Family Leave Tax Credit. The Act makes permanent the temporary provisions of the Tax Cuts and Jobs Act of 2017, which allowed employers to take a tax credit for providing paid family leave, and the Act also expanded the program to allow a tax credit for a certain percentage of premiums paid for policies of insurance providing paid family and medical leave for employees.
• Dependent Care Assistance Programs. The Act excludes from gross income employer-provided benefits under a Dependent Care Assistance Program (“DCAP”) and increases the maximum annual exclusion to $7,500 for joint tax filers.

Practical Employee Benefits Considerations for Employers.  Most employers provide employee benefits on a calendar year basis, which typically calls for re-assessing policies, practices, and budgeting well in advance of annual open enrollment periods.  The Act’s permanent relief for telehealth now invites employers with HDHP/HSA strategies to reassess the potential cost-savings and efficiencies associated with cost-free and minimal cost telehealth services.  Employers with paid family medical leave benefits, including via insurance, will want to revisit eligibility for a tax credit.  While the elimination of tax free moving expense reimbursements reduces one recruitment tool in the toolbox, employers may get more bang for their buck by beefing up their tuition/student loan reimbursement policies and enhancing their DCAP offerings, both of which are valuable tools for employee recruitment made stronger by the provisions of the Act.