Congress’s sweeping new budget and tax package (formally titled the One Big Beautiful Bill Act) contains several provisions that directly affect employers, benefits strategies, and workforce management. From new tax credits and savings incentives to changes in Medicaid and dependent care rules, these updates offer both opportunities and challenges for HR, payroll, and leadership teams.
Here’s a breakdown of the most important employer-facing changes in the bill, along with tips on how to prepare.
1. New Tax Breaks for Tipped and Hourly Workers
Starting in tax year 2025, employees in eligible tipped or hourly positions can deduct portions of tip and overtime income from their federal taxable income when they file their taxes. While this does not impact your pay structure directly, it does affect how employees experience their take-home pay and how you manage payroll reporting.
Key Highlights about Tax Breaks:
- Both tax breaks apply only to employees earning $150,000 or less ($300,000 for couples filing a joint return); after that, the credits phase out.
- Employees can claim up to $25,000/year in tips and $12,500/year in overtime pay (or $25,000 if married filing jointly) to be deducted from federal income taxes. Note: there is no tax break from FICA (social security and Medicare) taxes.
- Tip deductions apply to customary tipped occupations like servers, bartenders, hotel staff, and salon workers. A full list of approved occupations will be published by the IRS by October 2, 2025.
- Overtime deductions only apply to the premium portion of FLSA-defined overtime (the extra half-time over the regular hourly rate).
- This is for the federally required overtime wages of over 40 hours in a workweek, not the daily overtime wages required in some states.
- Tipped and overtime wage tax breaks are only approved for tax years 2025-2028.
Employer Impact of Tax Breaks:
- These deductions make low-wage jobs more financially appealing, aiding in recruitment and retention in industries like hospitality, retail, and food service.
- Employers must track and report tip income and overtime premiums accurately on W-2s. Need help with this new administrative complexity? Book a free consultation!
2. Stricter Medicaid Work Requirements
Although not a direct workplace mandate, the bill includes a new work requirement for Medicaid eligibility starting in 2025. This change could shift job-seeking behavior and increase administrative demands for employers.
What’s Changing with Medicaid Work Requirements:
- Adults aged 19–64 in the Medicaid expansion group must complete 80 hours/month of employment, job training, education, or community service to remain eligible.
- Exemptions apply for medical or caregiving reasons.
- States must verify compliance at application, then every six months afterwards.
Employer Impact from Medicaid Work Requirements:
- More applicants may seek part-time work to meet eligibility requirements.
- Your HR department may receive more requests for proof of employment or hours worked.
- Employees may lose coverage if they fail to comply, leading to increased absenteeism or turnover, particularly in lower-wage roles.
3. Health Savings Account (HSA) Expansions
Several pandemic-era flexibilities tied to HSAs are now permanent or expanded, providing more ways for employers to offer tax-advantaged health benefits.
Key Changes of HSA Expansions:
- Permanent telehealth coverage is available without having to meet the deductible for HSA-compatible HDHPs.
- Starting in 2026, employees can use HSA funds for Direct Primary Care (DPC)—up to $150/month for individuals, $300/month for families.
- HSA eligibility is expanding to include those enrolled in ACA Marketplace bronze and catastrophic plans when previously those high deductibles and max-out-of-pocket limits were too high to qualify.
Employer Impact from HSA Expansions:
- Makes HDHPs more appealing when bundled with telehealth or DPC access.
- Allows broader HSA participation across the workforce, especially for lower-cost insurance enrollees.
- Creates a great opportunity for employers to promote cost-conscious health plan options that encourage employees to be smart healthcare consumers that will reduce overall expenses.
4. Dependent Care FSA Limit Increases in 2026
For the first time since 1986 (except for a temporary 2021 increase due to COVID), the Dependent Care FSA limit is increasing, moving from $5,000 to $7,500 as of 2026.
Why a Dependent Care FSA Limit Increase Matters:
- Reflects the rising cost of childcare and elderly care, giving employees more pre-tax relief.
- Offers an easy way to enhance benefits for working parents and caregivers.
What Employers Must Do for Dependent Care FSA Limit Increases:
- Amend cafeteria plan documents and update benefits communications.
- Review IRS Section 129 nondiscrimination rules, which may become harder to pass with the higher cap.
5. Paid Family and Medical Leave (PFML) Tax Credit Made Permanent and Expanded
Originally passed as a temporary measure in 2017, the tax credit for offering paid family and medical leave is now permanent, with key improvements that expand eligibility.
What’s Included in PFML Tax Credits:
- Employers can claim a 12.5% credit on wages paid during PFML (up to 25% for higher wage replacement levels).
- Now includes a credit for insurance premiums paid while the employee is on leave.
- Employers in states with mandated PFML laws are now eligible if they offer more than the state requires.
How to Qualify for PFML Tax Credits:
- You must have a written PFML policy.
- The policy must offer at least two weeks of leave per year at 50% or more pay and be available to all qualifying employees.
Employer Impact of PFML Tax Credits:
- This credit provides stable, long-term financial support for employers who want to build strong leave programs.
- Allows small and mid-sized employers to compete for talent with larger organizations.
6. Student Loan Repayment Benefits Made Permanent
The bill allows employers to permanently offer tax-free student loan repayments per the educational assistance program. While the program limit is currently $5,250, the bill allows this amount to be adjusted for inflation.
7. Trump Accounts Created
The Big, Beautiful Bill also allows employers to contribute up to $2,500 per year to a new type of tax-advantaged account for children called a “Trump Account.” This account functions like a traditional IRA but is different in that:
- Accounts can be opened January 1, 2026
- They are for children born between 2025-2028
- Qualifying children will receive an initial $1,000 deposit by the government
- Money can be withdrawn as early as age 18 for first time homeownership, education, or small-business development
- If withdrawn for any other reason, there will be a 10% penalty unless the account holder waits until age 59 ½ to withdraw funds
- Account holders are limited to an annual post-tax contribution limit of $5,000 which can be made by parents, family, and friends
- Employer contributions are tax-free and count towards the $5,000 annual max
This could act as a tool to attract and retain employees who have or are planning to have children born between 2025-2028. Watch for more details about these accounts as we approach 2026.
8. Increased Budget for Immigration and Customs Enforcement (ICE)
The federal budget triples ICE’s funding to nearly $30 billion annually, with 10,000 new hires expected over five years. Employers, especially in agriculture, hospitality, construction, and manufacturing, should prepare for more audits, I-9 inspections, and worksite raids.
Final Thoughts: A Strategic Window for Workforce Gains
The One Big Beautiful Bill Act brings a mix of financial incentives, compliance requirements, and workforce shifts. For employers, there are several takeaways:
- Payroll and benefits systems must be updated to reflect new deduction and reporting requirements.
- HR policies around PFML, dependent care, and Medicaid verification should be reviewed and potentially revised.
- Communication with employees is key, as many of these changes can directly benefit your workforce but will require proper education and documentation.
Working with Stratus HR will give you a strategic advantage to help you proactively address these reforms, enhance your benefit offerings, improve recruitment and retention, and manage risk more effectively. For more information, please contact your Stratus account rep.
Not a current Stratus HR client? Book a free consultation and our team will contact you shortly.
Sources:
irs.gov
shrm.org
congress.gov
fisherphillips.com
nixonpeabody.com
aie.org