H.R.1, the One Big Beautiful Bill Act (the Act), was signed into law July 4, 2025. H.R.1 includes several significant changes that are relevant to employers for payroll, employment tax and employee benefits purposes, with some key provisions effective retroactively as of Jan. 1, 2025. The Department of the Treasury and the IRS are expected to issue guidance in the coming weeks to clarify how certain provisions will be implemented. ADP will closely monitor developments and provide updates as more details emerge.
Below, we provide an overview of key impacts to employer taxes and employee benefits. For more information, review our guide, which includes related articles and an on-demand webinar covering the key provisions of the Act.
TCJA changes to tax rates made permanent
The Act permanently adopts the changes to federal tax rates and standard deduction amounts that have been in effect since Jan. 1, 2018, following enactment of the 2017 Tax Cuts and Jobs Act (TCJA). The standard deduction will also increase for the 2025 tax year and will adjust for inflation in each subsequent year. The Act also provides a temporary $6,000 annual deduction through 2028 for taxpayers aged 65 or older.
The federal deduction for state and local taxes (the SALT cap)
Background
Under the TCJA, in the case of an individual, the itemized deduction for state and local taxes is capped at $10,000 ($5,000 for a married taxpayer filing a separate return). In general, income taxes paid or accrued in carrying on a trade or business or an income-producing activity are subject to the individual state and local tax (SALT) cap. The SALT cap is set to expire for taxable years beginning after Dec. 31, 2025.
Changes
The Act temporarily raises the federal cap on the SALT deduction from $10,000 to $40,000 starting in 2025, with inflation adjustments through 2029. The cap reverts to $10,000 in 2030. For those with modified adjusted gross income (MAGI) above $500,000 (2025), the limit on a taxpayer's deduction phases down, but will not drop below $10,000.
Employee Retention Tax Credit (ERTC)
The Act retroactively ends the Employee Retention Tax Credit (ERTC) program for third and fourth quarter (Q3 and Q4) 2021 claims that were filed after Jan. 31, 2024, effectively codifying, for those quarters, the current IRS ERTC processing moratorium. While businesses are not eligible to claim any Q3 and Q4 2021 claims filed after that date, claims from those quarters that were filed before Jan. 31, 2024, will still be processed. Claims from prior quarters are unaffected by the Act.
The new law also extends the statute of limitations for the IRS to assess the validity of Q3 and Q4 2021 ERTC claims. The IRS now has six years, as opposed to five years, from the date of filing to assess and audit claims from these quarters. The statute of limitations for 2020 and the first and second quarters of 2021 remains unchanged and is three years.
Paid family and medical leave tax credit
The Act permanently extends the federal paid family and medical leave employer tax credit that was created by the TCJA and set to expire at the end of 2025. The scope of the credit was also expanded.
Background
Under the original TCJA framework, eligible employers could claim a general business credit equal to 12.5 percent of wages paid to qualifying employees on paid family and medical leave, provided they paid at least 50 percent of the employee's regular wages.
The credit increased incrementally by 0.25 percent for each percentage point above that 50 percent threshold, up to a maximum credit of 25 percent.
The credit applied for up to 12 weeks of leave annually per employee. To qualify, employers had to maintain a written policy granting full-time workers at least two weeks of paid family and medical leave, with part-time employees eligible on a proportional basis. Employees also had to have been employed for at least one year and earn less than 60 percent of the highly compensated employee threshold.
Changes
The Act updates this structure by making the credit permanent and lowering the employment tenure requirement to six months, thus expanding eligibility. Additionally, the Act clarifies that state or local-mandated paid leave now counts toward satisfying the eligibility requirements for the credit, without impacting the amount of credit an employer may claim. The Act further expands the program to allow employers to claim the credit for amounts paid as premiums for qualifying paid leave insurance policies.
Research and development expenses
Background
Under the TCJA, for tax years beginning after Dec. 31, 2021, taxpayers were required to capitalize and amortize specified research and development (R&D) costs over a five-year period (or over 15 years for foreign R&D).
Changes
The Act allows taxpayers to immediately deduct domestic R&D expenditures after December 31, 2024. R&D conducted outside the U.S. must continue to be capitalized and amortized over 15 years.
Additionally, small business taxpayers with average annual gross receipts of $31 million or less will generally be permitted to apply the immediate expensing retroactively to taxable years beginning after December 31, 2021.
Taxpayers that made domestic R&D expenditures after December 31, 2021, and before January 1, 2025, are permitted to accelerate the remaining deductions for those expenditures over a one-year or two-year period.
Deduction for business meals
Background
Currently, for amounts incurred and paid after December 31, 2017, and before Jan. 1, 2026, expenses of the employer associated with providing food or beverages to employees through an eating facility that meets the requirements for de minimis fringes and for the convenience of the employer, are limited to a 50 percent deduction. Such amounts incurred and paid after December 31, 2025, aren’t deductible.
Changes
The Act maintains the current exemptions from the 50 percent deduction limitation, thereby preserving, and in some cases increasing, the amount eligible to be deducted. Notably, the Act expands the list of exemptions to include food or beverage provided on certain fishing vessels or certain fish processing facilities, making those meals fully deductible.
Work-related moving expenses
Background
Both the tax-free qualified moving expenses reimbursement for employees and the employer deduction for moving expenses were suspended in 2018 by the TCJA. This suspension was originally scheduled to last until the end of 2025.
Changes
The Act permanently removes both the exclusion for qualified moving expenses reimbursement and the deduction for moving expenses, except for active-duty members of the Armed Forces and members of the U.S. Intelligence Community.
Employer-provided childcare
Background
Currently, the Employer-Provided Childcare Credit provides businesses with a nonrefundable tax credit of up to $150,000 per year on up to 25 percent of qualified childcare expenses provided to employees. Therefore, an employer must spend at least $600,000 on childcare-related expenses to receive the full credit.
Changes
The Act permanently enhances the employer-provided childcare tax credit by raising the maximum credit from $150,000 to $500,000 and increasing the percentage of childcare expenses covered from 25 percent to 40 percent of qualified expenses (for example, amounts incurred in constructing a childcare facility or training childcare employees). To claim the full amount, a business must spend at least $1.25 million on childcare services.
Eligible small businesses benefit further as the maximum credit increases to $600,000 with a 50 percent credit rate, requiring $1.2 million in eligible spending to receive the full credit. An eligible small business is one that meets the gross receipts test of less than or equal to $25 million (inflation adjusted) based on the 5-year period (rather than the 3-year period) preceding the taxable year. In 2025, the small business gross receipts threshold is $31 million.
Additionally, the Act allows small businesses to pool their resources to provide childcare to their employees and for businesses to use a third-party intermediary to facilitate childcare services on the business's behalf.
New tax-free savings accounts for minors
The Act establishes “Trump accounts,” a new type of tax-advantaged savings account. Parents of any child under 18 may open a Trump account for their child.
Contributions may come from family members, employers or public and charitable entities, although guidelines on how such contributions are made remain outstanding.
Contributions must be made on an after-tax basis for taxable entities and may not exceed $5,000 annually (indexed for inflation) while contributions from tax-exempt organizations are unlimited. Contributions can only be made before the beneficiary turns 18, while withdrawals can begin the year the beneficiary reaches 18.
A temporary newborn pilot program will allow the federal government to contribute $1,000 per child into every eligible account for children born between December 31, 2024, and January 1, 2029.
Qualified transportation fringe benefits
Background
The bike commuter tax benefit, which allowed employers to reimburse employees up to $20 per month tax-free for bicycle commuting expenses, was suspended in 2018 by the TCJA.. This suspension was originally scheduled to last until the end of 2025.
Changes
The Act permanently eliminates the $20 per month qualified bicycle commuting reimbursement benefit. For qualified transportation fringe benefits other than the qualified bicycle commuting reimbursement, the Act adds an additional year of inflation adjustment.
Dependent care assistance program limits raised to $7,500
Background
For most of the last three decades, the maximum annual exclusion for dependent care assistance provided under a Dependent Care Assistance Program (DCAP) has been fixed at $5,000 (or $2,500 for separate returns filed by married individuals), with no adjustment for inflation.
Changes
For plan years beginning on or after 1/1/2026, the dependent care assistance exclusion increases (without future indexing) from $5,000 to $7,500 ($3,750 for married filing separate) for expenses paid or incurred under a qualified DCAP.
The Act didn’t increase the maximum dependent care tax credit (which remains at $3,000 for one child and $6,000 for two or more dependents), but it does increase the percentage of qualifying expenditures subject to the credit from 35 percent to 50 percent, in addition to a phaseout based on gross income. These changes may (1) affect the appeal of the DCAP benefits for employees based on their income, if the dependent care tax credit has a better financial impact than participation in a DCAP and (2) potentially create a higher percentage of high-wage earners participating in a DCAP, which could impact nondiscrimination testing under Internal Revenue Code Section 129.
Permanent extension of CARES Act tax-free student loan repayment assistance
Background
The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 allowed tax-free reimbursement of qualifying student loan payments up to $5,250 on behalf of employees until December 31, 2025. This is an exclusion from income tax for employees, and from payroll taxes for both employees and employers.
Changes
The Act makes the exclusion from taxes for employer-provided student loan payments permanent. For taxable years beginning after 2026, the $5,250 per-employee, per-year limit will be indexed for inflation.
Qualified High Deductible Health Plan treatment for individual bronze or catastrophic exchange plans
Beginning January 1, 2026, bronze or catastrophic coverage offered in the individual market on an Exchange will be treated as a qualifying High Deductible Health Plan (HDHP). Therefore, individuals enrolled in an individual bronze or catastrophic plan will be considered HSA-eligible.
Permanent HSA safe harbor for telehealth services
Background
The CARES Act also created an exception which allowed HDHPs to cover telehealth services on a first-dollar basis (pre-deductible). The CARES Act safe harbor expired for plan years beginning on or after January 1, 2025.
Changes
The Act makes permanent, and retroactively applies, the safe harbor for 2025 plan years, allowing HDHPs to cover telehealth and other remote care services with no deductible and without disqualifying individuals from contributing to an HSA.
Expanded HSA eligibility for direct primary care arrangements
Generally speaking, a direct primary care arrangement (DPA) is an alternative to fee-for-service insurance billing. Patients pay a fixed monthly or other periodic fee that permits them unlimited access to certain primary care services without the need to pay additional fees at the time of service. These arrangements were historically considered incompatible with HDHPs and disqualifying coverage for HSAs.
Changes
Beginning in 2026, participation in a DPA will no longer disqualify individuals from contributing to an HSA, as long as the DPA fees do not exceed $150 per month for an individual or $300 for a family (both amounts to be adjusted annually). To remain HSA compatible, covered services under the DPA cannot include procedures that require anesthesia, prescription drugs (other than vaccines), and certain laboratory services. The Act also makes certain DPA fees reimbursable through an HSA.
Conclusion
Employers should consult legal and tax counsel to determine the impact of the changes on their business. Employers also should look for guidance that is expected to come from the Department of the Treasury and the Internal Revenue Service. Employers can watch for more information and updates as it is released in ADP’s H.R.1 Resource Center.