OBBBA Compensation and Benefits Impact to Employers

The OBBBA signed into law on July 4 amends provisions related to excess executive compensation, employer deductions, and fringe benefits. These changes are in addition to changes related to information reporting and employer credits.

Public company excessive executive compensation deduction limits

The OBBBA modifies the entity aggregation rules under Section 162(m), which limits the annual deduction for compensation paid to covered employees of a publicly held corporation to $1 million per employee. When a publicly held corporation is a member of a controlled group under Section 414, all members of the controlled group must be examined for purpose of the disallowance rules.

Under the OBBBA, effective for taxable years beginning after Dec. 31, 2025, if any member of the controlled group provides remuneration to a specified covered employee, the payments are aggregated among the controlled group members so that if the total amount of remuneration exceeds $1 million, the deduction allowed to the group is limited to $1 million. The allowable deduction would be allocated among the applicable controlled group members that are paying compensation to the specified covered employee.

Crowe observation

These entity aggregation rules are already contained in the current Section 162(m) regulations but based on aggregation under Section 1504 rather than Section 414.

Excess compensation excise tax for tax-exempt organizations

Section 4960 imposes a tax (currently 21%) on applicable tax-exempt organizations (ATEOs) that pay covered employees more than $1 million in remuneration for a taxable year. The excise tax also applies to excess parachute payments to covered employees that are contingent on an employee’s involuntary separation from employment.

A covered employee is defined as any current or former employee that is one of the five highest-compensated employees of the organization for the taxable year or was a covered employee of the organization (or any predecessor) for any preceding taxable year beginning after Dec. 31, 2016.

For taxable years beginning after Dec. 31, 2025, the OBBBA expands the definition of “covered employee” under Section 4960 to include all current employees of the ATEO and former employees of the ATEO who were employees for any taxable year beginning after Dec. 31, 2026.

This change might have significant repercussions for large tax-exempt entities, such as universities, which might have a large number of employees that receive remuneration over $1 million.

Business meal expenses

Section 274 disallows deductions for certain entertainment, amusement, or recreation expenses, including meal expenses, unless an exception applies. As enacted by the Tax Cuts and Jobs Act of 2017 (TCJA), beginning Jan. 1, 2026, Section 274(o) would disallow deductions for expenses for food and beverages associated with an employer-operated eating facility, expenses related to operation of an employer-operated eating facility, and expenses for meals provided to employees for the convenience of the employer.

The OBBBA adds an exception to Section 274(o) for expenses that fall under Section 274(e)(8), relating to expenses for goods or services (including the use of facilities), which are sold by the taxpayer in a bona fide transaction for adequate and full consideration in money or money’s worth (such as restaurants). Thus, a restaurant or catering business can deduct its costs for food or beverage items purchased in connection with preparing and providing meals to its paying customers that also are consumed at the worksite by employees who work in the employer’s restaurant or catering business. The TCJA also excludes from Section 274(o) meals provided on certain fishing boats, at certain fish-processing facilities, on certain commercial vessels, on certain oil or gas platforms or drilling rigs, and at certain support camps that are proximate to and integral to certain oil or gas platforms or drilling rigs.

Dependent care assistance programs

Effective for taxable years beginning after Dec. 31, 2025, the OBBBA increases the employer-provided dependent care assistance maximum exclusion under Section 129 from $5,000 to $7,500 ($2,500 to $3,750 for married filing separate).

Educational assistance programs

The Coronavirus Aid, Relief, and Economic Security Act temporarily expanded Section 127 to make employer payments of principal or interest on qualified education loans tax-free to employees. The provision was extended by the Consolidated Appropriations Act of 2021 through the end of 2025. The OBBBA makes the exclusion permanent and adjusts the $5,250 maximum exclusion for inflation for tax years beginning after 2026.

Transportation and moving expenses

The TCJA suspended tax-free qualified bicycle community expenses and tax-free employer-paid moving expenses. Those provisions were scheduled to expire after 2025. The OBBBA makes permanent the suspension of tax-free qualified bicycle commuting expenses and tax-free employer-paid moving expenses but adds an exception for certain members of the armed forces or members of the intelligence community.

Looking ahead

The OBBBA made numerous changes to the tax rules affecting compensation and benefits. The breadth of these changes and the imminent effective dates have created a significant challenge for employers to understand and adapt to the new rules. Employers should consult tax advisers and payroll providers now to prepare for these changes.