Nondeductibility of employer-provided meals
The OBBBA provides relief from the meal expense deduction disallowance for certain restaurant and fishing industry employers
Section 274 disallows deductions for certain employer expenses that would otherwise be allowable, including expenses for food and beverages provided to employees. Deductions may be fully or partially limited, unless an employer meets one of the exceptions currently enumerated under section 274.
Currently, most food and beverage expenses are 50% deductible unless they meet an exception. However, the TCJA created section 274(o), which, beginning in 2026, disallows 100% of the deduction for expenses related to operation of an employer-operated eating facility, expenses for food and beverages associated with such facility, and expenses for meals provided to employees for the convenience of the employer. As section 274(o) was written, there were no exceptions.
However, the OBBBA adds an exception to section 274(o) for establishments that sell food and beverages to customers and also provide meals to their employees (e.g., restaurants), and for fishing vessels and certain fish processing facilities that provide meals to their employees. In the case where these exceptions apply, the 100% deduction disallowance will not apply to the food and beverage expenses.
Employee retention tax credit (ERTC)
The OBBBA expands the scope of existing penalties to address ERTC-specific misconduct.
Separately, the new law bars allowance of refunds claimed for the third and fourth quarters of 2021 after Jan. 31, 2024. The law extends the statute of limitations for the third and fourth quarters of 2021, giving the IRS additional time to make adjustments to ERTC claims and related income tax deductions.
TCJA temporary provisions made permanent
- Qualified bicycle commuting: The current suspension of tax-free treatment of qualified bicycle commuting reimbursements is now permanent.
- Moving expenses: The current suspension of tax-free treatment of employer-paid qualified moving expenses is now permanent (i.e., no future tax-free treatment for employer-paid moves), except in the case of certain members of the military and members of the intelligence community.
- Employer credit for paid family and medical leave: The paid family and medical leave credit is now permanent. Beginning in 2026, the credit is available for paid leave insurance premiums in addition to certain wages paid. Controlled group employers are treated as a single employer. Availability of the credit is expanded to employers in all states and the minimum work requirement for employees to qualify is reduced.
- Miscellaneous itemized deductions: The OBBBA permanently eliminates individual miscellaneous itemized deductions, other than certain educator expenses.
- Student loan debt: Employers can pay up to $5,250 per year in educational expenses on behalf of employees on a tax-free basis under section 127 plans. The OBBBA makes permanent the application of these plans to cover student loan debt. Separately, the new law provides for inflation indexing of the current $5,250 limit.
Health savings accounts (HSAs) and high-deductible health plans
The OBBBA enhances availability of HSAs beginning in 2026 by expanding the definition of a high-deductible health plan (HDHP) to include bronze or catastrophic health insurance plans through the Exchange, thus allowing enrollees to use funds from their HSA to cover expenses.
The law also makes permanent, beginning in 2025, a safe harbor for HDHPs, precluding disqualification because a plan does not have a deductible for telehealth and other remote care services.
The law amends the definition of eligible individuals that may make tax-free contributions to an HSA to include individuals provided medical care in a direct primary care service arrangement. A direct primary care service arrangement is an arrangement under which an individual is provided medical care consisting solely of primary care services provided by primary care practitioners if the sole compensation for such care is a fixed periodic fee.
Premium tax credits on health insurance
The OBBBA tightens the rules regarding premium tax credits on health insurance purchased through the Exchange. Premium tax credits are disallowed for individuals lacking annual eligibility verification, and for certain lower-income individuals enrolling during special enrollment periods.
In addition, if individuals receive more premium tax credits than they are entitled to, they are required to reimburse the IRS the full amount of the excess credit.
Tax on excess compensation paid by a tax-exempt organization
Under current law, section 4960 imposes an excise tax on excess compensation paid to a limited number of highly compensated employees, referred to as “covered employees”, by an applicable tax-exempt organization (ATEO).
For taxable years after 2025, the OBBBA expands the definition of covered employee to include any employee of an ATEO that receives remuneration in excess of $1 million (but it appears that the exception for remuneration paid to doctors for actual medical service is still in place).
Takeaways: Employers must adapt to OBBBA changes
The passage of the OBBBA will require most employers to evaluate and adapt their compensation and benefits programs and administrative practices.
Employers are encouraged to work with their payroll providers and other third-party administrators to understand and implement any changes to systems, processes, reporting and documentation required to carry out the changes under the OBBBA. Employers should also be talking with their tax advisors to understand the tax impact of the new provisions on their business and their service providers.
