2025 has provided no shortage of challenges and obstacles for organizations and their HR programs. The 2025 U.S. Budget Bill introduces several significant changes that will impact employee benefits, compensation and retirement programs. These changes not only affect how employers manage their workforces but also require strategic planning to ensure compliance and a competitive edge in the market.
One of the most notable changes in the U.S. Budget Bill is the introduction of nontaxable overtime income. Employees can now take a tax deduction on their overtime earnings, up to $12,500 for single filers and $25,000 for married filers. This means more money in employees' pockets, a change that is naturally welcomed by the workforce. However, as employers, it's crucial to consider the potential implications of this provision. For one, it may make overtime even more attractive to non-exempt employees, leading to an increased demand for overtime hours.
A second concern is that employees may work overtime without permission, and according to the FLSA, employers have to pay regardless of whether it was approved or not. This could result in higher labor costs, which might not have been part of your initial budgeting plans.
Employers should:
The healthcare landscape is also undergoing significant changes. The Bill enhances flexibility for HDHPs and HSAs by allowing telehealth and direct primary care services without violating the first-dollar coverage rule. This change is retroactive to the start of 2025, providing more flexibility and access to healthcare services for employees.
Employers should:
The sunsetting of premium tax credits at the end of 2025 and significant cuts to Medicaid may drive more individuals to seek employer-sponsored plans. It is expected that upwards of 8 million individuals over the next 10 years may lose access to Medicaid. These changes may drive more individuals to seek employer-sponsored health plans, potentially increasing healthcare costs and enrollment.
Employers should:
The limit for Dependent Care Flexible Spending Accounts (DCFSAs) has been raised from $5,000 to $7,500. This change allows employees to set aside more pre-tax dollars for dependent care expenses, potentially reducing their taxable income and increasing their take-home pay. However, employers must consider the impact on non-discrimination testing rules before raising the limit. Many employers have to limit the amount highly-compensated employees can set aside in Dependent Care Accounts because they don’t have enough participation from their non-highly-compensated employees. This could result in frustration if limits are increased and then have to be adjusted to pass testing.
Employers should:
The tax exemptions for paid family and medical leave will provide additional financial support to employees during leave periods.
Employers should:
New IRA-type accounts, known as Trump Accounts, have been introduced for individuals under 18 and newborns. Related to the newborn accounts, they provide a $1,000 contribution for newborns born between 2025 and 2028.
While this provision primarily benefits employees, employers can:
While the Budget Bill didn’t have significant retirement implications – previous legislation and market trends such as SECURE 2.0 and interest rate volatility are causing us to review our retirement programs.
Taking these into consideration, employers should:
While the U.S. Budget Bill has some favorable aspects to employees, it adds to the many changes in the market today and can increase the feeling of uncertainty. Employers can use this opportunity to manage these anxieties and maintain productivity and high performance, thereby differentiating their value proposition from competitors. A critical step in this process is understanding what programs employees value and the trade-offs they might be willing to consider.
Employers should:
The 2025 U.S. Budget Bill introduces a range of changes that can both benefit and challenge employers. By breaking through the uncertainty and proactively addressing these provisions, businesses can ensure they remain competitive, compliant and supportive of their workforce. The key is to stay informed, communicate effectively and adapt your benefits and compensation strategies to meet the new landscape.
What you can do now:
By taking these proactive steps, you can navigate the changes introduced by the 2025 U.S. Budget Bill and create a benefits and compensation strategy that supports your employees and drives your organization forward.
The U.S. budget reconciliation act includes major reforms to healthcare funding and the tax treatment of compensation. Here’s what you need to know.
As economic and geopolitical uncertainty places organizations and their people under increasing pressure to deliver impact, effective dialogue between employers and employees is critical
