The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025, after nearly six weeks of deliberations and amendments in both chambers of Congress. While the final version omits several of the health and welfare benefit provisions in the originally introduced legislation, the bill, as enacted, contains a number of changes for employee benefits that will largely go into effect in 2026. This article answers six common benefit questions from employers related to HSA eligibility and telehealth services or direct primary care service arrangements, the effect of increased dependent care assistance program limits on nondiscrimination testing, the potential impact of Medicaid cuts on group health plan enrollment, and the applicability of paid family medical leave tax credits to state-mandated programs.
Employers should watch for additional guidance to further clarify the scope and applicability of the OBBBA’s impact on health and welfare benefits. For an overview of other health and welfare benefit changes that are noteworthy for employers, please see our Compliance Corner article President Trump Signs One Beautiful Bill Act Into Law.
Telehealth and HSAs
Notably, the OBBBA includes a permanent extension of the telehealth HSA safe harbor, which had expired for plan years beginning January 2025. Generally speaking, for a participant to be eligible to make or receive tax-favored contributions to an HSA, the participant must be covered under a qualified HDHP and have no impermissible health coverage. In the context of HSA eligibility, impermissible coverage generally refers to any non-HDHP health coverage that provides “first dollar coverage,” meaning before the statutory minimum HDHP deductible is met, unless an exception applies.
To avoid jeopardizing employee HSA eligibility, employers that offered telehealth benefits alongside HDHPs paired with HSAs were traditionally required to charge the fair market value of any telehealth benefits received before the statutory deductible was satisfied. However, under the March 2020 CARES Act, intended to increase access to healthcare without the in-person contact risk of spreading COVID-19, HDHPs could temporarily provide telehealth services at no cost without negatively impacting HSA eligibility. The OBBBA permanently extends the telehealth exception for plan years beginning on or after January 1, 2025. This extension closed the gap between the expiration of telehealth relief that ended in December 2024 by allowing retroactive coverage beginning January 2025.
Are employers required to retroactively reimburse participants for telehealth services paid for beginning January 1, 2025?
No, the telehealth relief is entirely optional for employers to adopt. This means that employers may choose whether to offer no-cost telehealth coverage – including to HDHP/HSA participants – for 2025 and future plan years. For instance, an employer could choose to continue to charge full market value for services through their 2025 plan year and adopt no-cost coverage for the 2026 plan year. Alternatively, an employer could decide to adopt no-cost telehealth coverage now through the end of the current plan year. Because the relief is retroactive to January 1, 2025, another alternative is to retroactively apply no-cost telehealth coverage to the beginning of the 2025 plan year.
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NFP Observation |
Carriers and telehealth vendors may be unwilling to accommodate a retroactive adoption of no-cost coverage, as it may create significant administrative difficulties in re-adjudicating claims that were previously subject to fair market value cost-sharing. As a result, before implementing retroactive changes, employers must consult with their vendors or carriers to confirm that claims incurred earlier in 2025 can be processed in a timely manner. If an employer chooses to adopt the telehealth relief (whether prospectively or retroactively), coverage changes should be clearly communicated to participants through enrollment materials and plan document amendments (Summary of Material Modification or updated Summary Plan Document). Note that if a change in telehealth cost-sharing requires updating the content of the plan’s Summary of Benefits and Coverage, that must be distributed to participants at least 60 days in advance of the coverage change. |
Does the telehealth exception for HSA eligibility under the OBBBA extend to virtual primary care, specialty care, and behavioral health outpatient visits?
Yes, the telehealth HSA ineligibility exception applies to professional medical services provided remotely. Neither the CARES Act that initially introduced the telehealth exception nor the OBBBA that permanently extends it defines “telehealth and other remote care services.” However, for Medicare coverage purposes, CMS defines telehealth as the “exchange of medical information from one site to another through electronic communication to improve a patient’s health.” Under this definition, electronic communication includes a variety of technology applications and services that enable video and/or audio conferencing. Further, telehealth services can be rendered by a range of providers, such as doctors of different specialties, physician assistants, nurse practitioners, clinical psychologists, and licensed clinical social workers. However, certain services related to medical equipment or prescription drugs prescribed by a remote care medical provider fall outside the scope of the telehealth exception. Further agency guidance may ultimately clarify the scope of no-cost telehealth and remote care services that do not impact HSA eligibility.
Direct Primary Care Service Arrangements and HSAs
To expand access to primary care services while preserving HSA eligibility, the OBBBA creates a narrow exception for certain direct primary care service arrangements (DPCSAs). Previously, individuals enrolled in direct primary care arrangements were generally ineligible to make HSA contributions, unless the fees were solely for preventive care or other permitted coverage (such as dental or vision). The OBBBA also amends the definition of qualified medical expense for purposes of reimbursement from an HSA for qualified DPCSA fees. These provisions are effective beginning January 1, 2026.
What types of DPCSAs are compatible with HSA eligibility?
Under the OBBBA, individuals who have DPCSAs with aggregate monthly fees not exceeding $150 (for an individual) or $300 (for a family, e.g., meaning covering more than one individual) will be eligible to make contributions to an HSA.
Note that under the OBBBA’s definition of DPCSA, an individual pays a fixed periodic fee to a licensed health care provider for a defined set of primary care services. To preserve HSA-eligibility, the DPCSA must not function as insurance nor cover services beyond primary care. The law directs federal agencies to issue guidance defining the scope of primary care services under a qualified DPCSA. It also makes clear that certain types of care – such as specialty treatment, inpatient services, diagnostic imaging, surgical procedures, and emergency care – are excluded from that definition and will disqualify an individual from HSA eligibility if included in the arrangement. Importantly, an arrangement marketed as a DPCSA may not necessarily qualify under this provision. The determining factor is the substance of the arrangement, not its label.
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NFP Observation |
Employers should have a reasonable belief that an employee is eligible to make or receive HSA contributions. This includes verifying whether the employee is enrolled in the employer’s HDHP and is not enrolled in any of the employer’s other health coverage options that would be considered impermissible coverage. However, employers generally are not responsible for policing whether an employee is HSA-ineligible based on impermissible coverage elsewhere, such as through a spouse’s employer or a coverage arrangement that would not qualify for the DPCSA exception. In most situations, an employer would have no reason to know that their employee is enrolled in a DPCSA which is typically an agreement between a patient and provider, not through an employer-sponsored plan. Although not required, many employers work with their HSA vendor to provide educational resources to help employees determine for themselves if they are HSA-eligible. For more information on HSA eligibility and impermissible coverage, please ask your broker or consultant for a copy of the NFP publication Health Savings Accounts: A Guide for Employers. |
Medicaid Eligibility Changes and Funding Cuts
The OBBBA includes sweeping changes for Medicaid, including new eligibility and enrollment conditions, additional state administrative responsibilities, and limits to retroactive coverage. The law also includes new limits to states’ abilities to tax providers, which have been a primary mechanism for how states finance their Medicaid programs. As a result, states may be forced to either raise general taxes or cut Medicaid benefits.
In addition, the OBBBA includes a number of new requirements for Medicaid expansion states, which are states that have expanded Medicaid coverage under the Affordable Care Act. Specifically, the law introduces new work requirements for Medicaid expansion enrollees, including an 80-hour/month work requirement for able-bodied adults. The law also contains a 10% reduction in federal funding for expansion states that use their Medicaid program to cover undocumented immigrants.
How will the Medicaid eligibility changes and funding cuts affect employer-sponsored health plan enrollment?
As seen during the Medicaid redetermination process following COVID, when individuals are dropped from Medicaid coverage, they often seek alternative coverage through an employer-sponsored plan. Loss of Medicaid coverage gives rise to a 60-day HIPAA special enrollment right, allowing individuals to enroll in group coverage midyear, outside of open enrollment. However, the timeframe and manner in which the planned cuts to Medicaid will be implemented under the OBBBA are still uncertain. Also, the changes to Medicaid eligibility and new work requirements may largely impact individuals who were previously ineligible for employer-sponsored coverage. As a result, it remains unclear if and when group health plan enrollment will increase as a result of Medicaid eligibility changes and funding cuts.
Increased Dependent Care Assistance Program Annual Limits
Under Section 129 of the Internal Revenue Code, a dependent care assistance program (DCAP, also referred to as a dependent care FSA) is an employer-sponsored plan that pays or reimburses dependent care expenses incurred by the employee to enable both the employee and their spouse to work or look for work. A DCAP can be funded directly by the employer or provided under a cafeteria plan, funded with pre-tax salary reduction dollars. Currently, the annual maximum tax exclusion provided under a DCAP is $5,000 per year (if single or married, filing jointly), or $2,500 if married, filing separately. The OBBBA increases the annual tax exclusion to $7,500 (or $3,750 if filing separately) for tax years beginning January 1, 2026, and indexed annually for inflation. Employers are not required to raise the exclusion amount under their DCAPs, but those that do for 2026 must work with their vendors to update applicable plan documents, enrollment materials, and payroll systems.
A DCAP is subject to nondiscrimination provisions to prevent employers from designing plans that favor top earners (referred to as highly compensated employees (HCEs)) and ensure that the tax exclusion is available only when the benefits are provided fairly across the workforce. One of the nondiscrimination tests focuses on actual benefit utilization — that is, which employees are making tax-advantaged contributions and receiving reimbursements through the DCAP. To pass this test, the average benefits provided to non-HCEs must be at least 55% of the average benefits provided to HCEs (e.g., for every $100 reimbursed to HCEs, at least $55 must be reimbursed to non-HCEs). For more information, please ask your broker or consultant for a copy of the NFP publication Dependent Care Assistance Program Nondiscrimination Rules: A Guide for Employers.
How will the new DCAP annual limits impact nondiscrimination testing?
Raising the annual limit from $5,000 to $7,500 may make it more difficult for some employers to pass nondiscrimination testing. In general, HCEs are more likely to elect DCAPs, so adopting a higher contribution limit may lead to a higher rate of utilization among HCEs. If non-HCE participation does not increase proportionally, plans may fail the 55% average benefits test, which compares utilization between employee groups.
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NFP Observation |
Non-HCE participation in DCAPs tends to be low, often due to concerns about forfeiting unused funds and the upfront cost of dependent care. Many non-HCEs are hesitant to participate because they worry about inaccurately estimating future care expenses and losing pre-tax contributions under the “use-it-or-lose-it” rule. Lower-paid employees might also find it difficult to set aside pre-tax dollars for future reimbursement. In many childcare arrangements, families must pay for care in advance, but DCAP reimbursement can only be made after the care has been provided. This delay between payment and reimbursement creates a cash flow barrier for lower-paid employees, making the benefit less accessible and contributing to nondiscrimination testing challenges. Employers may need to adjust plan design, monitor elections closely, and enhance employee communication to encourage broader participation and maintain compliance. |
Note that if a DCAP fails to satisfy nondiscrimination testing, HCEs will lose the applicable tax exclusion, and their DCAP reimbursements become taxable. Non-HCEs are not affected by a discriminatory plan design; they still qualify for the tax advantages associated with the DCAP. Employers will not face any monetary penalties for a discriminatory DCAP, but discriminatory amounts included in income for HCEs will be subject to employment (and income) taxes.
Paid Family and Medical Leave Tax Credits
Under the Tax Cut and Jobs Act of 2017 (TCJA), employers that provide paid family and medical leave (PFML) may qualify for a tax credit equal to a percentage of wages paid through December 31, 2025. However, under the TCJA, any leave required by state or local law does not qualify for a tax credit and will not be taken into account in determining eligibility based on the total amount of employer-provided paid family and medical leave. The OBBBA makes the tax credit permanent and broadens its scope and applicability.
Do the OBBBA’s expanded PFML tax credits apply to state-mandated PFML programs?
Not directly. The OBBBA allows state or local mandated PFML to count toward meeting the tax credit eligibility thresholds (at least a two-week leave period and a 50% wage replacement rate) if covered by the employer’s written policy. However, the actual tax credit will only apply to employer-paid amounts exceeding state or local PFML requirements.
The amount of the employer tax credit depends on how much employers provide for PFML relative to an employee’s wages beyond what is required by state PFML programs. Employers should consult their tax advisors for more information on the credit, including calculations under the OBBBA.
Final Thoughts
The OBBBA impacts several aspects of employee benefits. Employers should be aware, however, that none of the new provisions actually require any immediate action by employers. Rather, the new benefit provisions (aside from the Medicaid changes described above) are entirely optional for employers. As noted above, we expect additional guidance on several of the new provisions. We will continue to monitor for developments and guidance related to the OBBBA and report any updates in Compliance Corner.