The final version of the One Big Beautiful Bill Act (OBBBA) was signed by the President on July 4, 2025. It includes several provisions affecting employee benefits. It also includes changes to Medicaid and Medicare eligibility and limits on ACA-exchange subsidies. These changes do not directly affect employer-sponsored group medical benefits. However, because they may reduce other medical coverage options for some employees or their dependents, employers may see more enrollees in their group medical plans.

A proposed cap on tax benefits for employer-provided health plans was not included, so these benefits remain more valuable – after taxes – compared to equivalent cash compensation. Employers and their employees will continue to benefit from the tax benefits available for group health plans.

The OBBBA also includes some changes to benefits that can make them more attractive to employees and employers.

1. Expands eligibility and coverage for health savings accounts (HSAs), increases the HSA contribution limits (for some employees), and provides the ability to reimburse for telehealth expenses from the first dollar without affecting HSA eligibility permanently.
2. Make repayment of student loans part of educational assistance plans under IRC Section 127 permanent.
3. Increased incentives to offer subsidized childcare.
4. Makes tax credits for a part of wages for paid family and medical leave permanent.
   
   

What Are the Details?

The final version of the OBBBA includes several notable changes from earlier drafts—especially regarding employee benefits. These changes reflect both Senate amendments and the outcomes of conference negotiations.

Tax Treatment of Employee Benefits

Preservation of Tax Incentive for Employer Health Plans 

The final bill removed any proposed cap on the tax exclusion for employer-provided health benefits, maintaining their existing tax-advantaged status and avoiding a potential increase in taxable income for employees. This is a significant win for both employers and employees, as it maintains the incentive for robust employer-sponsored health coverage.

Health Savings Accounts (HSAs) – More Options

Telehealth expenses can now be offered at reduced or no cost without affecting HSA eligibility, retroactive to January 1, 2025. This change makes permanent a temporary pandemic-era provision that allowed low-cost telehealth co-payments or reimbursements under high-deductible health plans (HDHPs) without disqualifying participants for contributing to HSAs. It supports the continued use of telehealth as a cost-effective alternative to in-person care.

Bronze & Catastrophic ACA Exchange Plans qualify as HDHPs – Under current law, many bronze and catastrophic ACA Exchange plans don’t qualify as HDHPs, making participants with those levels of coverage ineligible for HSAs. Starting in 2026, individuals with such coverage, including those employed by small businesses, will be allowed to make valid HSA contributions. Employers could also contribute to those HSAs, even if they are not enrolled in the employer’s health plan.

Direct Primary Care Arrangements (DPC) – In the past, the IRS has treated these arrangements, where individuals pay an annual fee for enhanced access to a physician, as additional insurance. Under the OBBBA, DPC options can now be offered alongside traditional HDHPs while still allowing the covered individual to fund an HSA. This is permitted even if some medical services are provided at no cost. However, the covered services are limited and must generally be considered preventive. The services cannot include procedures that require general anesthesia, most prescription drugs (other than those that are preventive, such as vaccines), or non-ambulatory lab work. Employers may want to wait for further guidance to be released before adopting these changes.

Bicycle Commuting Reimbursement – The exclusion of employer bicycle commuting reimbursements was reversed retroactively to January 2025, reinstating the $20/month tax-free benefit to employees who bike to work.

Student Loan Repayment Exclusion – A COVID-era temporary provision allowing employers to use IRC Section 127 educational assistance programs for tax-free student loan repayments (up to $5,250/year) was made permanent, effective in 2026. Prior to the change during COVID, the 127 plans only covered current education expenses.

Tax Credits to Employers to Offer Specialized Benefits

Paid Family Leave and Child Care Credits –

Paid Family Leave (PFL) Credit – OBBBA permanently extended the PFL credit (effective for taxable years beginning in 2026), expands it to permit payment of PFL insurance premiums, makes it available in all states and lowers the work requirement (at the discretion of the employer) from one year to six months. The credit (12.5% to 25% of wages or premiums paid) is provided to employers who have a written policy, provide at least two weeks of PFL annually, and pay at least 50% of normal wages to employees on PFL. The credit remains nonrefundable and is only available for leave that is in addition to any leave required by state or local law.

Enhanced Child Care Credit – Provides an increased credit of 40% (50% for small businesses - gross receipts of less than $25,000,000 over a 5-year window) of qualified childcare expense up to $500,000 annually ($600,000 for small businesses) to employers who offer payment of qualified childcare expenses.

Trump Account Contributions – Employers can make contributions of up to $2,500 on a tax-free basis to Trump Accounts of employees or their dependents, provided the employer establishes a separate written plan maintained by the employer. Employers must comply with nondiscrimination and other applicable rules. The $2,500 employer contribution limit is part of the overall $5,000 annual contribution limit to Trump Accounts, which applies to all contributions from individuals, employers, and other entities (with some exceptions for government or charitable contributions).

Many Anticipated Changes Were Eliminated in the Senate Version

Some commentators were convinced that many changes to employee benefit plans were uncontroversial and would likely sail through without opposition. Like so many political prognostications, these were not borne out in the final bill.

Expansion of Individual Coverage Health Reimbursement Arrangements (ICHRAs)- ICHRAs are permitted by virtue of regulations promulgated during the first Trump administration. As such, the proponents wanted to pass legislation to make them less subject to political changes and to expand their availability and usefulness. They even went so far as to rebrand them as Custom Health Option and Individual Care Expense Arrangements (CHOICE Arrangements). The change would have made them permanent, offered an opportunity for employees to fund the accounts with pre-tax payroll deductions (which is not currently permitted under the regulation), and offered an employer tax credit for offering an ICHRA.

Senate-Eliminated HSA-Enhancing Changes – HSAs, as noted above, did receive renewed support in the OBBBA. However, the proponents had hoped for even more far-ranging enhancements.

1. Increasing (doubling) the HSA contribution limits (limited to those with income below $75,000 single/$150,000 married.
2. Permitting some individuals who are currently ineligible to fund an HSA to do so – those who are enrolled in Medicare Part A (which currently will eliminate the ability to fund the HSA)
3. Permitting access to certain on-site medical clinics (currently, if those expenses are covered before the HDHP deductible, no HSA contribution is permitted).
4. Permitting individuals whose spouses are enrolled in general purpose health FSAs to contribute to the HSA.
5. Expansion of ability to use HSA funds for some additional expenses (such as gym memberships).

Provisions That Are Not Direct Employee Benefit Enhancements That May Encourage More Enrollment in Employer Plans

Medicaid and Medicare Revisions

OBBBA includes changes to both Medicaid and Medicare that will likely restrict eligibility. There are new work requirements and time limits on Medicaid eligibility (as well as provisions intended to remove undocumented immigrants from Medicaid). That is expected to result in some current Medicaid recipients millions of Americans, including employees and their families, losing Medicaid coverage or facing reduced benefits. Medicare would also limit eligibility to those in the US legally, as well as affecting those who are currently eligible for both Medicaid and Medicare. Some have warned that the cuts will negatively affect access to care for children, seniors, and low-income workers. However, employers with large numbers of low-wage or part-time employees may see increased pressure to offer employer-sponsored health coverage, or could see additional enrollment in their current plans.

Health Insurance Marketplaces- ACA Exchanges

The bill also enacts policy changes to the Health Insurance Marketplaces. It reduces federal subsidies and tightens eligibility, meaning some employees who previously relied on Marketplace coverage will likely seek employer-sponsored insurance or go uninsured. This could increase demand for employer health plans, especially among lower-income workers.

General tax provisions directed at families – Exclusion of tip and overtime income, child tax credit, car loan interest deduction, savings accounts for newborns, and other tax benefits.

These features all seek to provide families and lower paid workers with more disposable income. For example, a major feature of the final bill is the income tax exemption (albeit not FICA or FUTA taxes, and only for a three-year window currently) for tip and overtime income. For employees in traditionally tipped occupations and those working overtime, this means a portion of their compensation is now tax-free, increasing take-home pay and potentially making such jobs more attractive. Presumably, that could have the result of increased participation by those groups in employer plans if they have more disposable income (assuming the employer plans permit their participation). Similarly, the other provisions noted above could have the same potential effect.

Extension of 2017 Tax Cuts

The bill permanently extends the lower individual tax rates from the 2017 Tax Cuts and Jobs Act, which includes favorable treatment for many employer-provided benefits and increases after-tax income for most employees. That change will not directly affect employees’ take-home pay. Therefore, how it will affect employee behavior is not clear.

Conclusion

The final OBBBA has several provisions that directly and indirectly enhance employer-provided health and welfare benefits. In addition, several other provisions may encourage more participation in these benefits. The OBBBA preserves the tax-advantaged status of employer health benefits, introduces new tax exemptions for tip and overtime income, and enacts restrictions on Medicaid, Medicare, and the ACA Exchange subsidies that could indirectly increase the importance of employer-sponsored health coverage, as some individuals may find it harder to qualify for public coverage or subsidies. Employers should prepare for increased demand for benefits and communicate these changes to their workforce as the law takes effect.

This update is not intended to be exhaustive, nor should any discussion or opinion be construed as legal advice. Readers should contact legal counsel for legal advice. All rights reserved.