On Thursday, July 3 House Republicans passed the One Big Beautiful Bill (OBBB) (H.R. 1) by a vote of 218 to 214, nearly entirely along party lines. All 212 Democrats voted in unison against the bill, and were joined by two Republicans, Reps. Thomas Massie of Kentucky and Brian Fitzpatrick of Pennsylvania. President Trump signed the bill into law on July 4. The OBBB includes updates to overtime pay taxation, revises executive compensation rules for public companies, and modifies employer benefit programs. Key changes affect health savings account (HSA) eligibility, telehealth services, and the business tax credit for paid family leave. Additionally, the legislation makes the employer student loan repayment benefit permanent. Employers should review these provisions carefully to prepare for effective dates starting in 2025.
The following are provisions of interest to HR Policy Association member companies.
- Temporary Deduction on Taxes for Overtime: Provides a temporary above-the-line deduction for qualified overtime compensation earned between tax years 2025 and 2028. Under the proposal, overtime pay would be exempt from federal income tax up to $12,500 for individuals and $25,000 for married couples filing jointly. The deduction phases out for taxpayers with modified adjusted gross income (MAGI) over $150,000 (individuals) or $300,000 (joint filers). Qualified overtime compensation is defined as overtime pay mandated by the Fair Labor Standards Act (FLSA) that exceeds the employee’s regular rate of pay. This deduction would be available to all eligible taxpayers, whether or not they itemize deductions. To claim it, filers must include their Social Security number—or their spouse’s, if filing jointly—on their Form 1040. Employers would be required to report the total overtime compensation on employees’ W-2 forms, which employees will need to substantiate their deduction. Importantly, while the proposal eliminates federal income tax on qualifying overtime pay, payroll taxes for Social Security and Medicare would still apply.
- Temporary Deduction on Taxes for Tips: Establishes a temporary above-the-line deduction of up to $25,000 for qualified tips received by individuals working in occupations where tipping is customary and regular. The deduction would be available to employees who receive a Form W-2 as well as independent contractors who receive Form 1099-K, Form 1099-NEC, or who report tips on Form 4317 (Social Security and Medicare Tax on Unreported Tip Income). Taxpayers could claim this deduction whether they take the standard deduction or itemize. The benefit begins to phase out for taxpayers with modified adjusted gross income (MAGI) over $150,000 ($300,000 for joint filers). This deduction would apply to tax years 2025 through 2028. For 2025, employers required to report tip income could rely on “any reasonable method” to estimate designated tip amounts under a transition rule. Within 90 days of enactment, the Secretary of the Treasury would publish a list of qualifying occupations. This provision would take effect for taxable years starting after December 31, 2024, and would expire for taxable years beginning after December 31, 2028.
- Executive Compensation: Under current law, public corporations cannot deduct compensation paid to certain executives that exceeds $1 million per year. The OBBB introduces a controlled group aggregation rule for determining both the five highest-paid employees in a given year and the total compensation paid to specified covered employees. Under this rule, remuneration from all entities within a controlled group counts toward the $1 million deduction limit. If the aggregate compensation exceeds the limit, the allowable deduction is allocated among the group members that paid the remuneration. This provision would take effect for tax years beginning after December 31, 2025.
- Expands Health Savings Accounts: The OBBB significantly broadens HSA eligibility. Previously, only individuals enrolled in a high-deductible health plan (HDHP) could contribute to an HSA, and many bronze and catastrophic plans exceeded IRS cost-sharing limits to qualify as HDHPs. Under the new rules, all bronze and catastrophic plans will be treated as HSA-eligible, effective for months beginning after December 31, 2025. Additionally, individuals with HDHPs and HSAs will now permanently be allowed first-dollar coverage for telehealth services. This provision takes effect for plan years beginning after December 31, 2024. The OBBB also permits patients with HDHPs and HSAs to enroll in Direct Primary Care (DPC) arrangements and pay for their DPC memberships with HSA funds. HSA distributions for DPC are capped at $150 per month for individuals and $300 per month for families, indexed for inflation. This change applies to months after December 31, 2025.
- Permanent Exclusion for Employer-Provided Student Loan Assistance and Inflation Adjustment: Currently, an employer can make non-taxable contributions to an employee’s student loan repayments through educational assistance programs, and the first $5,250 of employer-provided education assistance is excluded from an employee’s gross income. The OBBB makes this permanent and also starting in tax year 2027 indexes for inflation the current exclusion limit of $5,250 for such educational assistance programs. This is effective for payments made after December 31, 2025.
- Enhanced business tax credit for paid family leave: The OBBB extends and expands the 2017 provisions providing tax credits to employers that offer paid family and medical leave to employees caring for ill family members. Originally set to expire at the end of 2025, the credit is now permanent. Additionally, employers may now offer the benefit to employees after six months of service, reducing the previous minimum service requirement of one year.
Permanent Increase to ABLE Account Contribution Limits: Employed individuals with disabilities may contribute extra funds to their ABLE accounts, up to the lesser of their annual earnings or the federal poverty level for a single-person household. The bill permanently extends this higher contribution limit and adds one additional year of inflation adjustments to the contribution threshold.
