Employee Benefits

Review your employee benefit offerings to ensure they continue to maximize potential tax breaks, while providing benefits that attract and retain qualified employees. OBBBA includes several provisions that directly affect employee benefits, while other changes may have an indirect impact on employer group medical plans.

Tax Credits for Small Business Retirement Plans

The credit for small businesses that set up a new retirement plan can be as much as $5,000 for three years. This credit provides small business owners with an incentive to offer their employees access to a retirement plan. For businesses that enroll new hires, another $500 in tax credits is automatically available each year for up to three years. And under OBBBA, credits can cover up to 100% of plan startup costs, increased from 50%.

The maximum auto-enrollment contribution for the first year of employment is 10% of compensation. Employees must have the choice to opt out of auto-enrollment. After the worker's first year, safe harbor plans can automatically increase employee contributions up to a maximum of 15% of compensation. Again, employees must have the option of opting out. Additionally, you have until the due date for your company's tax return filing to establish a plan and claim the credit for the previous year, which gives you more time to provide your employees with a profit-sharing contribution.

Qualified Retirement Plan Offset

If a participant fails to repay a loan, the plan may provide that the account balance is reduced or offset by the unpaid portion of the loan. The plan loan offset amount is the outstanding balance. A plan loan offset amount is treated as an actual distribution for rollover purposes. Suppose the plan loan offset is due to termination of the plan or severance from employment. In that case, an employee has until their federal income-tax due date, including extensions, for the taxable year in which the offset occurs to come up with and roll over the offset amount.

Qualified Plan Limits

The annual compensation limit for retirement accounts under Sections 401(a) (17), 404(l), 408(k)(3)(C) and 408(k)(6)(D)(ii) is $360,000 (estimated) in 2026.

SMART MOVE: Get ready. In fall 2025, the IRS released final Roth catch-up regulations confirming that beginning next year, highly paid employees ($145,000+ in wages) who wish to make catch-up contributions to your 401(k) plan can only make them to a Roth account. If your plan doesn't allow Roth contributions, these employees won't be able to make any catch-up contributions in 2027 and later. Therefore, you may want to discuss adding Roth contributions to your plan with your benefits advisor. However, a plan sponsor can't force all employees to make their catch-up contributions to a Roth account, although this would simplify administration.

ESOPs

The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period is $1,415,000 (to be adjusted for 2026). The dollar amount used to determine the lengthening of the five-year distribution period is $280,00 (to be adjusted for 2026).

Plan Compliance

To support new deductions and credits, businesses may face additional documentation rules, including: Enhanced reporting for employee wage types (e.g., tip income, overtime tracking), verification for green or domestic-use incentives, and additional due diligence standards for tax preparers. Also, fines and penalties for non-compliance with ERISA requirements have increased annually, ranging from a few hundred dollars to a six-figure fine. Work with a compliance professional to ensure you don't trigger penalties or fines.

Expanded Child Care Assistance Benefits

The employer-provided childcare tax credit has increased from $150,000 to $500,000 (and up to $600,000 for small businesses), now covering 40%–50% of eligible expenses and indexed for inflation.

Student Loan Payments

TCJA allowed employers to make nontaxable contributions toward employees' student loan payments. The OBBBA makes this exclusion permanent. Additionally, it indexes the maximum educational assistance exclusion to $5,250 for inflation after 2026. You may also offer matching 401(k) contributions to employees based on their repayment of student loans. Participation is voluntary, and employees must opt in to participate.

SMART MOVE: Employers may consider reviewing and updating their educational assistance plans to include employees' student loan payments and track the inflation adjustment for 2026.

Employer FMLA Tax Credit Extended

Beginning January 1, 2026, employers may continue to claim a credit of 12.5% to 25% of qualifying wages, depending on the employee's wages. The 2026 limit is $93,000 and will be adjusted for inflation in future years. Alternatively, an employer may elect a new method allowing the credit to be calculated based on premiums paid for qualifying paid leave insurance policies.

Taxable Fringe Benefits

Generally, you must report the value of benefits you provide to your staff as employees' taxable income—unless explicitly excluded by the IRS. These benefits include employee discounts on goods or services, parking subsidies of up to $340 (as of 2026), and company services offered at cost. They also include modest holiday gifts, minimal personal use of office equipment, and even occasional company parties. The value of more substantial benefits, such as personal use of a company car or a country club membership, must also be included in taxable income. Note that, starting in 2026, most moving expenses and bicycle commuting reimbursements are now taxable.

Flexible Spending Accounts (FSAs)

In 2026, the contribution limit for health flexible spending accounts (FSAs) is $3,300, and 20% of the limit, or $660, can be carried over. For dependent care FSAs, the limit will increase to $7,500 for single individuals and married couples filing jointly. Thanks to OBBBA, telehealth services are now permanently included under high-deductible health plans (HDHPs).