While the One Big Beautiful Bill Act (OBBBA) that President Trump signed into law on July 4, 2025, somewhat surprisingly does not directly address any issues related to qualified retirement plans, it does impact executive compensation in a couple of ways that may be of interest to executives and their financial advisors.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) limits the deduction of compensation paid to certain specified “covered employees” of publicly-traded companies to $1 million. Effective as of 2027, OBBBA expanded the group of covered employees to include not only the CEO and CFO, but also the next eight highest-paid employees.
Until 2027, the covered employee group consisted only of the CEO, CFO and the next three highest-paid employees. In addition, under OBBBA, effective in 2026, whether compensation of a covered employee has surpassed the $1 million threshold will be determined on a controlled group basis.
For this purpose, a controlled group consists of certain related employees, affiliated service group members and management service groups. In other words, pay from any member of the controlled group will be aggregated towards reaching the $1 million threshold; previously, whether the threshold was met was determined on a company-by-company basis, in a silo fashion without aggregation.
With regard to the tax-exempt entities, in a similar vein, effective in 2026, OBBBA broadened the definition of “covered employees” for purposes of Code §4960, which imposes a 21% excise tax on compensation in excess of $1 million paid to any employee.
OBBBA expanded the scope of Code §4960, much to the chagrin of major post-secondary institutions of higher learning and hospital systems. The first Trump Administration introduced the excise tax as part of the Tax Cuts and Jobs Act of 2017.
Before this change under OBBBA, the covered employee group was based on the employee’s position with the organization or whether they were among the five top-paid employees. Under OBBBA, the group also includes former employees employed after December 31, 2026.
The apparent rationale for these changes in limiting the deductibility of compensation is to increase tax revenue. In light of these changes, public companies and tax-exempt organizations will need to review their pay structures regarding the loss of deductible compensation, and executives of these entities will need to consider adjusting their financial planning.
In addition, OBBBA has made some noteworthy changes in health and welfare plans that will affect employee and fringe benefits. OBBBA made permanent the telehealth relief safe harbor for a high-deductible health plan (“HDHP”) that permits telehealth services to be provided on a “first-dollar” (meaning pre-deductible basis) without causing issues concerning health savings account (“HSA”) eligibility (HSAs work in tandem with HDHPs).
To contribute to an eligible HSA, the participant must be covered under an HDHP that does not offer any form of impermissible coverage - a plan that provides first-dollar coverage would be providing an impermissible form of coverage.
Meeting the safe harbor is important, in general, because without it, an HDHP’s participant’s deductible would first have to be met before telehealth services could be used because HSA eligibility ends where a non-HDHP health plan provides “first dollar coverage,” that is, before the statutory minimum HDHP deductible is satisfied.
This new rule is effective retroactive to January 1, 2025. Safe harbor relief was made available temporarily during the COVID-19 pandemic, but that relief ended for plan years after December 31, 2024, necessitating the change in the law.
Furthermore, OBBBA instituted a new direct primary care arrangement (“DCPA”), akin to concierge medicine, without causing HSA disqualification based on being a non-preventative service offered before exhaustion of the HDHP deductible.
DCPA services must consist solely of those provided by primary care practitioners. HSAs can be used to pay for this service so long as the monthly fee does not exceed $150 for an individual and $300 for a family, as adjusted for inflation.
A DCPA can provide primary care services (excluding certain things like general anesthesia, certain prescription drugs other than vaccines and certain lab services not typically used in an ambulatory setting). A DCPA may be implemented after December 31, 2025.
Finally, under the OBBBA, effective in 2026, the maximum amount that can be contributed to a dependent care flexible spending account (“FSA”) is increasing to $7,500 from the prior $5,000 limit.
While the OBBBA made several impactful changes in the employee benefits context, it would not be shocking if the Trump Administration and Congress put forth additional proposals in this area in the coming years.
Matthew I. Whitehorn is a partner in the firm’s tax group, chair of the employee benefits group, and chair of the pro bono committee at Dilworth Paxson LLP.
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