The passage of the “One Big Beautiful Bill” Act is one of the most sweeping legislative updates to labor and employment law in my recent memory.
With wide-ranging implications for employers, employees and compliance professionals alike, this legislation marks a turning point in how U.S. businesses will manage their workforce across pay, benefits, eligibility and audits.
Whether you operate a restaurant, manage a warehouse or lead a professional services firm, these changes will likely touch your payroll systems, benefits administration and HR policies.
Here’s what you need to know—and how your business can respond strategically.
1 | No Federal Tax on Overtime and Tips (2025–2028)
For the next three years, tipped and hourly workers will benefit from a temporary provision that allows significant portions of overtime and tip income to be exempt from federal taxation.
What it means:
Employees in “customarily tipped” occupations — like servers, bartenders, hotel staff and hairstylists — can deduct up to $25,000 annually in eligible tip income.
Only tips reported for payroll tax purposes and subject to federal withholding qualify.
Overtime pay, as defined under the Fair Labor Standards Act (FLSA), is also partially deductible but only the premium portion (the amount paid above 40 hours at 1.5x rate).
Why it matters: This change may increase employee take-home pay, providing a valuable tool for recruitment and retention in industries with high turnover. Employers, however, must ensure proper payroll tracking and new W-2 reporting to remain compliant.
2 | Dependent Care FSA Limit Increase (2026)
Effective in 2026, the annual contribution cap for Dependent Care Flexible Spending Accounts will rise from $5,000 to $7,500.
Considerations for employers:
Unlike healthcare FSAs, the dependent care limit still does not adjust with inflation.
Employers will need to revise plan documents, notify participants and ensure ongoing nondiscrimination testing per IRS regulations.
For working families this modest increase may offer more flexibility in managing child and elder care expenses, which in turn supports workplace productivity and engagement.
3 | Increased Immigration Enforcement and Form I-9 Scrutiny
Funding for Immigration and Customs Enforcement (ICE) worksite enforcement has tripled. That means more audits, more Form I-9 inspections and potentially higher penalties.
Industries most likely to be targeted: Construction, agriculture, hospitality and logistics are sectors that traditionally rely on large numbers of hourly or contract workers.
Best practice: Conduct an internal Form I-9 audit now. Ensure forms are up to date, verify proper documentation and train managers on how to respond to audits professionally and within legal guidelines.
4 | Medicaid Work Requirements and Workforce Implications
A new federal requirement mandates at least 80 work hours per month for non-disabled, working-age adults to retain Medicaid eligibility. While intended to encourage employment, this could disrupt coverage for part-time or variable-schedule workers.
Implications for businesses:
HR departments may be asked to certify hours or employment status.
Employers with lower-wage, part-time staff may see an increase in absenteeism or turnover if workers lose healthcare access.
This may prompt job seekers to prioritize roles that offer more stable schedules or employer-sponsored health plans.
5 | Expanded Use of HSAs and Telehealth Benefits
Starting in 2026, new legislation will permanently expand the use of Health Savings Accounts (HSAs). This is a welcome change for small businesses and entrepreneurs offering high-deductible health plans who want to supplement benefits with low-cost care options.
Opportunity in the Details: These regulatory shifts signal a growing emphasis on modernizing workplace benefits, increasing enforcement of labor laws and incentivizing employment in key sectors. While compliance demands will increase, forward-thinking businesses can use these changes to reexamine their policies, strengthen employee value propositions and better align with the evolving labor market.
In times of regulatory change, clarity and preparation are your greatest assets. Whether it’s revising benefits plans, updating payroll processes or preparing for audits, the businesses that thrive will be those that meet change head-on — and turn it into opportunity.
Amy B. Bakay, SHRM-SCP, is the founder and CEO of HR NOLA. She may be reached via email at amybakay@hrnola.com.
