Congress is actively discussing the “One, Big, Beautiful Bill” – the budget bill that could determine tax policy over the coming decade. It includes several ideas that could significantly shape employee compensation and benefits strategy beyond obviously impacting the lives of hardworking Americans. This blog post summarizes those ideas from the latest drafts.
None of the following should be viewed as political endorsement or legal advice, but rather an analysis of how these provisions could impact the employer-employee social contract. Here’s text of the bill that passed the House on May 22, 2025.
No Tax On Tips up to $25,000
In the latest bill that passed the Senate on May 20, 2025, select workers in industries to be finalized after the bill’s passing can deduct up to $25,000 of tip income. Today, tipped workers have to report anything north of $20.
It’s no secret that industries featuring tipped workers – from restaurants to beauty salons to drivers – typically face lower wages of less than $20 per hour. With this tax relief for those workers, even for those earning income of up to $160,000 in the previous tax year, one can expect to see an effective 10% - 25% of cash flow bump.
What will be really interesting is to see whether those industries will use this opportunity to advance benefits that leadership previously saw as a non-reality for workers. For example, rather than encouraging workers to save for retirement or even emergencies, quick service restaurants more often focused on earned wage access and other loan-style products. So will the incremental cash from this tax relief actually mean more money in workers’ pockets?
No Tax On Overtime
Similarly, employees who are earning overtime wages will also see tax waived on that income as long as they’re not a highly compensated individual, typically non-exempt under the Fair Labors Standards Act (FLSA).
This is likely a larger impact than the No Tax on Tips because of the larger breadth of the workforce from retail to the trades to healthcare to hospitality to construction. The no tax is also extra valuable as the wages associated with overtime are typically 1.5x normal hourly rate. Could we see intentional shift schedules for tax optimization as a result of this idea?
"Trump” Accounts seeded with a $1,000 pilot for kids born 2025-2028
Starting January 1 next year, kids born after January 1, 2018, can open a Trump Account (initially introduced under the title Money Accounts for Growth & Advancement or “MAGA Account”), allowing up to $5,000 in annual after-tax contributions from parents, relatives, or employers. Tax-exempt entities like foundations can contribute without limits. The funds are invested in a U.S. equities index, growing over time. Contributions stop once the child turns 18, but withdrawals can be made for education, training, business, or a first home starting at age 18, with tax advantages. By 25, they can access the full balance for qualified reasons, and by 30, for any reason at all.
Additionally, the federal government will deposit $1,000 into the accounts of every U.S. child born between 2024 and 2028. This could result in substantial growth over time, with $1,000 potentially turning into $10,000 by age 30, and larger contributions leading to balances of $175,000 or more. While this could significantly build wealth, there are questions about the tax efficiency of withdrawals, especially since unqualified distributions are taxed as ordinary income. It’s an exciting new savings tool, but its tax impact is worth considering.
Bike Commuting Reimbursement to Remain Tax Free
Employers can currently reimburse $20 per month to employees biking to work. That reimbursement will continue to be considered tax free to the employee and employer.
Tax Credits for Employer-Provided Child Care
Child care remains a major challenge for working parents. It’s costly, time intensive to find trusted quality care for the ones they love. The House draft includes provisions intended to make child care easier.
The draft increases the total credit per employer from $150,000 to $500,000, with up to $600,000 for eligible small businesses. Previously, employers could claim only 25% of their childcare spend, but that’s now increasing to 40% (and 50% for eligible small businesses). It also introduces two new provisions to allow for an intermediary child care services provider and for small businesses to pool resources.
With these incentives, it’s reasonable to expect more employers providing child care resources for their working parents – and certainly a boon for providers who are already in the space. The key question remains the crossover impact with other income-tested child care related benefits, and whether those will be curtailed.
Nonrefundable Employer Tax Credit for Paid Family Medical Leave
Another employer incentive to do better for new parents or employees taking medical leave. The current paid family and medical leave (PFML) tax credit allows businesses to claim 12.5% to 25% of wages paid to employees on leave, provided they meet certain conditions. The credit, set to expire after 2025, applies to employees who have worked at least one year and earn under 60% of the highly compensated employee limit.
The new provision makes the PFML tax credit permanent and introduces three key changes: it expands the credit to include paid family leave insurance premiums, applies to all states, and lowers the employee work requirement from one year to six months.
With several states like Colorado having state-level paid family leave program, one could expect to see a more family friendly workplace.
Extending non-taxability of student loan assistance
Under current law, employees can exclude up to $5,250 of employer-provided educational assistance from their gross income, including tuition, fees, supplies, and student loan payments made by the employer (through 2025). This benefit helps reduce taxable income for employees while supporting their education and loan repayment.
The new provision makes the exclusion for employer-paid student loan assistance permanent and adjusts the $5,250 maximum for inflation. This change ensures the benefit keeps pace with rising education costs and provides ongoing support for employees managing educational expenses and debt, making it a valuable incentive for both employees and employers.
In the same month as the restart of student debt collections, it would’ve been a double whammy if employer-provided assistance were also suddenly taxed. The indexing to inflation would also be much appreciated as tuition continues to increase 4-6% per year.
Small Employer Incentives for Healthcare Reimbursement
Prior law allowed for employers to provide a health reimbursement arrangement (HRA) for certain medical expenses. But that’s being loosened to allow purchase in the broader marketplace. Small businesses with less than 50 employees would also receive an incentive of $100 per employee per month in their first year and $50 per employee per month in their second year. The renamed program is called Custom Health Option and Individual Care Expense (CHOICE).
Addressing gaps in HSA, FSA, HRA
The draft also includes several other provisions intended to close potentially restrictive rules of using HSA, FSA, and HRA.
Some employees previously couldn’t save via an HSA if they were using discounted on-site clinics. That restriction has been eased. HSAs can now also be used to a certain extent on fitness and sports.
FSAs and HRAs have also traditionally carried time-based restrictions. The draft allows for conversion of funds at the employer’s discretion into an HSA if the respective employee changes to an eligible HDHP plan.
No action on Retirement and Emergency Savings
There isn’t anything significant in here about Retirement Savings or Emergency Savings as of yet. We expect that that’s likely going down the line as a separate measure.
It does however include a Saver’s Credit eligibility clarification for contributions to ABLE accounts.
Changes in Medicaid, Medicare may add pressure on employers
While it’s still too early to quantify the full impact, one thing is for uncertain – Medicaid and Medicare programs will be undergoing change. Portion of that change stems from work requirements for able-bodied individuals to qualify to receive Medicaid services. It also increases, relative to recent years, the spend share to states, so there will invariably be an adjustment period like has happened previously.
What this could mean is that individuals will lean more heavily on their employers for access to healthcare, even if not expressly on a health plan, and also ask for greater job certainty. The temporary tax relief from other provisions like no tax on tips and overtime may in turn be directed towards asking for more help on healthcare coverage and economic mobility.
Rising long-term interest rates as national debt grows
All projections currently point to the final bill increasing the national debt. We see that impact through the long-term treasury rates rising over the last week. What this means is that even though the take-home pay may see a bump, so will the outflow towards paying interest on debt like mortgages and student loans.