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2025 Employee benefits and executive compensation update | Baker Tilly
Article | 2025 year-end tax planning
2025 Employee benefits and executive compensation update
Nov. 12, 2025 · Authored by Christine Faris, Aneta Stefaniak
As we approach 2026, we’re preparing for the Jan. 1, 2025, implementation of mandatory Roth catch-up contributions from the SECURE 2.0 retirement plan legislation. Additionally, several provisions from the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21) are also set to go into effect at the beginning of the year. While cost-of-living adjustments have already been released for health plans, the updates for retirement plans and Individual Retirement Accounts (IRAs) are still pending. In the meantime, the topics outlined below are important to consider for both year-end tax planning and planning for the year ahead.
Employer-sponsored plans
Roth catch-up contributions to employer-sponsored plans: IRS recently issued final regulations on Roth catch-up contributions confirming that the effective date is Jan. 1, 2026. The Roth mandate for catch-up contributions does not apply to all employees. For 2026, it impacts only those employees who earn more than $150,000 in FICA wages in 2025.
If a retirement plan does not currently allow Roth contributions, consider adding a Roth provision. Only plans that permit Roth contributions can accept Roth catch-up contributions. Without this provision, Roth catch-up contributions are not allowed. If a plan does allow Roth catch-up contributions, all participants aged 50 or older must be given the option to make them. However, the requirement to make catch-up contributions as Roth only applies to high earners.
Increased catch-up contributions: Plan participants who are 60-63 years old are permitted to make higher catch-up contributions. The increased catch-up limit for 2026 is $11,250. Plans are not required to provide for increased catch-up contributions. However, if the plan already offers regular catch-up contributions, it must be amended to allow for the higher contribution amounts. For any employees in this age group who are required to have their catch-up contributions made as Roth, the increased catch-up amount must also be made as a Roth contribution beginning in January 2026.
Cost-of-living adjustments to health plans: The applicable dollar limits for 2026 are as follows:
Cost-of-living adjustments to health plans
Health and welfare benefit plan limitation
2025
Change
2026
Health savings account (HSA) contribution limits
Family
$8,550
↑
$8,750
Single
$4,300
↑
$4,400
Catch-up limit (age 55 and older)
$1,000
=
$1,000
HDHP annual deductible
Family
$2,800
↑
$3,000
Single
$1,650
↑
$1,700
HDHP out-of-pocket minimums
Family
$16,600
↑
$17,000
Single
$8,300
↑
$2,200
Excepted benefit under HRA annual contribution limit
Family
$2,150
↑
$2,200
Employer-provided fringe benefits
Student loan payment assistance: The Tax Cuts and Jobs Act (TCJA) permitted employers to make non-taxable contributions towards employees’ student loan payments under an educational assistance plan. The OBBBA makes this exclusion permanent beginning in 2026. In addition, the OBBBA indexes the maximum educational assistance exclusion of $5,250 for inflation after 2026. Employers should review and update their educational assistance plans for inclusion of employees’ student loan payments.
Reimbursement of qualified moving expenses: The tax deduction for qualified moving expenses was temporarily suspended through 2025, making reimbursements for moving expenses taxable to the employee. The OBBBA makes permanent the elimination of the deduction for moving expenses and the exclusion for employer-provided qualified moving expense reimbursements. There are a few exceptions in the case of members of the Armed Forces or the intelligence community. Employers should review their relocation policies for federal tax compliance and continue to treat moving expense reimbursements as taxable compensation to employees.
Reimbursement of qualified transportation expenses: Prior to the TCJA, employers were permitted to provide tax-free reimbursements to employees for bicycle commuting expenses. However, that benefit was suspended by the TCJA through 2025. The OBBBA permanently eliminates this benefit effective as of Jan. 1, 2026. Employers should continue to treat bicycle commuting reimbursements as taxable and review policies to ensure compliance. In addition, for tax year 2026, the monthly cap for other qualified transportation fringe benefits and the monthly limitation for qualified parking increases to $340, up $15 from 2025.
Meals provided to employees: Before the TCJA, employers were able to fully deduct the cost of meals provided to employees. This included office snacks, coffee, soda, meals during meetings and dinners for employees working late. In 2017, the TCJA reduced the deduction to 50%. The OBBBA eliminates the deduction entirely beginning in 2026. There are a few exceptions for the fishing industry, but for most businesses, these expenses will no longer be tax-deductible. However, employee events such as picnics, holiday parties, etc., remain 100% deductible. Businesses should review the business purpose of employer-provided meals and evaluate whether the benefit for employees justifies the cost.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
Effective as of Jan. 1, 2026, the OBBBA increases the dependent care assistance limit to $7,500 (or $3,750 in the case of married individuals filing separately). Note, however, that these amounts will not be indexed for inflation. If a dependent care assistance plan wants to take advantage of the increased dollar threshold, the plan will most likely need to be amended. Keep in mind that employees must be given reasonable notice of the availability and terms of the dependent care assistance program. Employers should review and update DCAP plan documents for the higher limit and coordinate any changes with payroll systems to ensure accurate withholding and W-2 reporting.
Health care flexible spending accounts (FSAs): The dollar limit on pre-tax employee contributions to health care FSAs is $3,400 for 2026, up $100 from 2025.
Paid family and medical leave: The tax credit for employers who provide paid family and medical leave was enacted as part of the TCJA in 2017 and was set to sunset this year. However, the OBBBA makes the paid family and medical leave credit permanent. It allows the credit to be based on either wages paid to employees on leave or on premiums paid for family and medical leave insurance policies. The OBBBA also expands the definition of a “qualifying employee” to include those employed for at least six months and for at least 20 hours per week. Employers who offer paid family and medical leave should review their current program for compliance with the changes made by the OBBBA.
Equity awards
Incentive stock options (ISOs), and impact of increased SALT deduction cap and its AMT implication: The OBBBA raises the cap on state and local tax (SALT) deductions from $10,000 to $40,000 annually for tax years 2025 through 2029, with a 1% annual increase. However, under the Alternative Minimum Tax (AMT) regime, SALT deductions are disallowed and added back to income, potentially increasing AMT liability. This is particularly relevant for taxpayers exercising ISOs. The spread between the exercise price and the fair market value at exercise is included in AMT income, and the disallowed SALT deduction can further increase AMTI income, making it more likely that the AMT will be triggered. Furthermore, the OBBBA reset the base year for the AMT exemption phaseout threshold and accelerated the exemption phaseout, meaning more high-income taxpayers could find themselves subject to AMT in 2026 and beyond. High income taxpayers may want to consider exercising ISOs in 2025 and/or consider delaying the sale of previously exercised ISOs until 2026 to reduce AMT liability.
Equity awards and impact of charitable giving as a tax mitigation tool: The expanded SALT deduction and potential AMT exposure make charitable giving a more attractive strategy for high-income taxpayers with equity compensation. Charitable contributions can reduce regular taxable income and, in some cases, AMT income. ISO exercises can be coordinated with charitable giving to offset AMT impact. Individuals can also use appreciated stock from RSU or option exercises for donations to avoid capital gains and receive a deduction based on the fair market value of the stock.
Equity awards and impact of QSBS expansion: The OBBBA has expanded the tax benefits and eligibility criteria for Qualified Small Business Stock (QSBS), increasing the gross-asset limit for qualifying companies to $75 million and raising the capital gain exclusion up to $15 million. It also introduced a tiered structure for capital gain exclusions based on shorter holding periods: 100% for five years, 75% for four years and 50% for three years. Employees and executives at startups and pre-IPO companies should now assess whether their equity awards, such as restricted stock, RSUs or options, could qualify for QSBS treatment. This will depend on the company's asset size at the time of vesting or option exercise and the holding period before sale. Given the broadened eligibility and shortened holding periods, it's critical to track grant and vesting dates, plan around liquidity events and consider timing the sale of shares to maximize tax exclusion benefits under the new rules.
Executive compensation
$1 Million compensation deduction limit for publicly-held corporations: The annual compensation deduction that a publicly-held corporation is allowed for compensation paid to covered employees is limited to $1 million per covered employee. Prior to the OBBBA, related companies were aggregated based on the companies allowed to file a consolidated income tax return. Beginning in 2026, the OBBBA significantly broadens the required aggregation by including all companies in the controlled group. It requires compensation paid by members of the controlled group to a covered employee to be aggregated to determine compensation in excess of the $1 million deduction limit. The deduction limit will be allocated to each member of the controlled group based on the amount each company paid the covered employee. The OBBBA revision is effective for tax years beginning in 2026. Public companies should determine companies within the controlled group, identify covered employees and track compensation paid by each company to determine the total compensation paid and the allocable portion of the $1 million limit.
Expansion of covered employee group: The TCJA modified the definition of covered employees for purposes of the $1 million deduction limit for publicly-held companies to include the CEO, CFO and the next three highest compensated officers. The TCJA also expanded covered employees to include anyone who was ever a covered employee, such as covered employees who terminated employment or retired. The group of covered employees was further revised under ARPA, effective for tax years beginning in 2027, to include the next five highest paid employees, whether or not officers. ARPA 5 is not part of once covered, always covered group. Public companies should review their systems to ensure accurate determination of the next five highest paid employees across all companies in the controlled group. They may also want to review or restructure compensation plans to defer compensation.
Excise tax on compensation over $1 million paid by tax-exempt organizations: The TCJA enacted a 21% excise tax on tax-exempt organizations that paid compensation in excess of $1 million and any excess parachute payments to the five highest paid employees. The OBBBA expands the group of covered employees to include all employees and former employees since 2017 for tax years beginning in 2026. Tax-exempt organizations should review compensation arrangements, including severance and deferred compensation. With the expansion of covered employees to include all employees and former employees, tax-exempt organizations should prepare for increased tax liabilities.
FICA taxation rules for nonqualified deferred compensation: We are still seeing numerous instances where employers are not taking into account deferred compensation for the Federal Insurance Contributions Act (FICA) at the appropriate time. Pursuant to FICA’s,, “special timing rule,” deferred compensation is required to be taken into account at the later of the time of the performance of services or when there is no longer a “substantial risk of forfeiture” in entitlement to the benefit—this is usually at such time as the benefit becomes vested. Employers should confirm that the deferred compensation, even if not distributed, is taken into account in accordance with the “special timing rule” so that required FICA taxes are correctly paid.
IRAs and required minimum distributions
IRA catch-up contributions: Individuals who have reached age 50 are eligible to make catch-up contributions. As of Nov. 3, 2025, the threshold for 2026 has not been released.
Required minimum distributions (RMD): The required beginning age for taking an RMD is 73. For individuals who turn 73 in 2025, the deadline to take their first RMD is April 1, 2026. This requirement applies to employer-sponsored retirement plans as well as IRAs, including Simplified Employee Pension (SEP) plans and Savings Incentive Match Plan for Employees (SIMPLE) IRAs.
RMD rules and roth accounts: The RMD rules do not apply to Roth IRAs or Roth 401(k) accounts.
If you have questions on how the OBBBA’s amendments to employee benefits and executive compensation provisions impact your tax situation, please contact your Baker Tilly tax advisor.
