Health and welfare implications for employers in budget reconciliation bill

The budget reconciliation legislation (H.R.1) signed into law by President Trump on July 4, 2025, includes provisions affecting employer plan sponsors of certain health and welfare benefits, including health savings accounts (HSAs), dependent care flexible spending accounts (FSAs) and qualified educational assistance programs. H.R.1’s specific provisions have various effective dates, as described in more detail below.

HSA eligibility

Telehealth safe harbor

(Effective retroactively for plan years starting on or after January 1, 2025)

H.R.1 retroactively reinstates and permanently extends the telehealth safe harbor under which telehealth and other remote care services are not disqualifying coverage for HSA-eligibility purposes. The safe harbor, introduced during the COVID-19 pandemic, had previously expired for plan years beginning after December 31, 2024. Under the H.R.1 extension, employers can continue offering telehealth benefits to employees at no cost, below fair market value or before the high-deductible health plan (HDHP) minimum annual deductible is met, without affecting HSA eligibility.

Employers will want to consider the following:

• The safe harbor allows — but does not require — employers to cover telehealth benefits before the HDHP minimum annual deductible is satisfied, without affecting HSA eligibility.
• The retroactive effective date means that employees who were receiving telehealth benefits under the safe harbor can continue doing so without experiencing a gap as had occurred under prior extensions.
• Any changes to telehealth benefits must be communicated to plan participants in a timely manner.

Direct primary care service arrangements

(Effective for months beginning on or after January 1, 2026)

H.R.1 provides that direct primary care (DPC) service arrangements are not disqualifying coverage for HSA-eligibility purposes. H.R.1 also allows account holders to use their HSAs to reimburse themselves, on a tax-preferred basis, for DPC service arrangement fees they have paid.

Eligible DPC service arrangements are those that provide solely for primary care services provided by primary care practitioners in which the sole compensation is a fixed periodic fee. Primary care services do not include procedures that require general anesthesia, prescription drugs (other than vaccines) or laboratory services that are not typically administered in an ambulatory primary care setting. The aggregate fee for all DPC service arrangements cannot be more than $150 per month ($300 per month when covering more than one individual). These limits will be indexed for inflation.

Employers should consider the following:

• Employers will want to decide whether to offer employees access to qualified DPC service arrangements alongside their medical plans, including HSA-qualified HDHPs
• Employers will want to decide whether to revise employee communications addressing HSA eligibility or qualified medical expenses to reference DPC service arrangements

Dependent care FSAs

Increase in annual dollar limits

(Effective for tax years beginning on or after January 1, 2026)

Under Internal Revenue Code (IRC) section 129, certain contributions to dependent care FSAs are excluded from employees’ gross income. H.R.1 increases the annual exclusion limit for dependent care FSAs from $5,000 to $7,500 if single or married and filing jointly (or from $2,500 to $3,750 if married and filing separately). Note that dependent care FSA limits are not indexed for cost-of-living adjustments.

Employers should consider the following:

• Employers are not required to amend their dependent care FSAs to allow for the increased limits.
• Employers wishing to allow for the increased limits should determine what changes are needed to their dependent care FSA plan document and implement those changes.
• If the dependent care FSA is amended, employers will want to make sure that the changes are accurately reflected in enrollment materials and communicated to plan participants in a timely manner.
• Dependent care FSAs must comply with nondiscrimination rules that prevent the dependent care FSA from discriminating in favor of highly compensated employees — or else risk the elections of highly compensated employees being cut back (if the plan permits) below the applicable annual limits or their elections losing favorable tax treatment. H.R.1 makes no changes to the dependent care FSA nondiscrimination rules, which means highly compensated employees are unlikely to receive any tax benefit from the increased limits. Employers will want to consider what impact the increased limits will have on nondiscrimination testing, whether they want to design their dependent care FSA to limit elections by highly compensated employees and what needs to be communicated to employees to promote use of the dependent care FSA.

Employer student loan repayments

Tax exclusion for employer student loan repayments

(For the tax exclusion, permanent for tax years beginning on or after January 1, 2026; for the cost-of-living adjustment, effective for tax years beginning on or after January 1, 2027)

H.R.1 makes permanent the tax exclusion for certain employer payments toward employee student loans under a qualifying educational assistance program. This exclusion, established by the Coronavirus Aid, Relief, and Economic Security Act and extended by the Consolidated Appropriations Act of 2020, was set to expire on January 1, 2026. The current $5,250 limit for qualified educational assistance will now also be indexed annually for inflation.

Employers will want to consider the following:

• Employers currently offering a student loan repayment benefit to employees under their qualified educational assistance program will no longer have to worry about the temporary nature of the tax exclusion and should be mindful of the cost-of-living adjustments that will start in 2027.
• Employers considering offering a student loan repayment assistance benefit to employees will need to review the requirements for qualified educational assistance programs under IRC section 127, including notifying eligible employees about the availability and terms of the program and applicable nondiscrimination rules.

Moving and bicycle commuting expenses

Tax benefits for moving expenses

(Effective for tax years beginning on or after January 1, 2026)

H.R.1 permanently eliminates the employee tax exclusion under IRC section 132 for certain employer-paid moving expenses and the employee tax deduction under IRC section 217 for certain work-related moving expenses, except for certain active-duty members of the armed forces. It also expands upon the class of individuals eligible for tax benefits to include certain members of the intelligence community. The Tax Cuts and Jobs Act (TCJA) enacted in 2017 temporarily suspended these tax benefits, except for members of the armed forces, for tax years 2018 through 2025.

Employers will want to consider the following:

• Employers currently offering moving expense reimbursements to employees should review their policies and payroll processes to ensure that they continue to include reimbursements in the employee’s taxable income, except to the extent the employees fall within the permissible classes eligible for tax benefits.
• Employers can amend their moving expense policies to expand upon which employees are eligible to have qualified moving expense reimbursements excluded from gross income to include certain members of the intelligence community.

Tax benefits for bicycle commuting reimbursements

(Effective for tax years beginning on or after January 1, 2026)

H.R.1 permanently eliminates the tax exclusion (of up to $20 per month) for employer-provided qualified bicycle commuting reimbursements. The TCJA temporarily suspended this exclusion for tax years 2018 through 2025.

Employers will want to consider the following:

• Employers may continue to reimburse employees’ bicycle commuting expenses on a taxable basis.
• Employers choosing to provide a taxable bicycle commuting benefit to employees must determine how the program will be designed and communicate to employees about the benefit.

Going forward

• Employers should review the H.R.1 provisions affecting their health and welfare benefits and determine what, if any, changes must be made to remain compliant.
• Changes affecting plan design or current plan terms should be communicated to participants in a timely manner.