Prepare Your Systems for H.R. 1-Related Reporting and Administration

The sweeping H.R. 1 law (otherwise known as the One Big Beautiful Bill Act), passed in July, includes a number of total rewards-related provisions that will require updates to human resources information systems (HRIS), payroll processes and benefit eligibility systems.

The federal legislation establishes tax adjustments affecting both employees and employers, and encompasses areas ranging from tips, overtime and executive compensation to health savings accounts (HSAs) and student loan repayment support.

“W-2 changes, income thresholds and potential Medicaid tracking rules will put pressure on HRIS, payroll and benefit eligibility systems,” said Marta Turba, the vice president of content strategy at WorldatWork. “Failing to track and report accurately may result in tax filing errors, compliance risks or misalignment with Medicaid work requirements.”

With some changes retroactively impacting the current calendar year and others taking effect next year, employers will need to ensure their technology stack reflects the new compliance requirements.

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Compensation and Payroll System Updates

In the area of payroll and compensation, experts shared these system updates may be required:

W-2s need to include reporting fields that separate qualified overtime compensation from base pay. H.R. 1’s overtime deduction requirements apply the Fair Labor Standards Act (FLSA) definition of qualified overtime, said Benjamin Poor, the senior counsel at ADP, an HR, payroll and benefit services provider. “Since many employers pay overtime based on more-generous standards than [those found in the] FLSA — either based on state laws, collectively bargaining agreements or employer policies — overtime is not always calculated based on FLSA standards,” he said, adding payroll systems will need to be updated to identify and track the portion of overtime paid that is FLSA-qualified to correctly determine deduction eligibility.
Methods need to be in place to track qualified tips based on occupation-specific guidelines. Employers will need to update their systems to collect information from employees and independent contractors at the front end that can be used to report their occupation on W-2 and 1099 forms. Additionally, independent contractors will now be required to report qualified tips separately on a 1099 rather than in combination with other forms of income — “a completely new process for independent contractors,” Poor said. Those forms and processes will need to be updated as well.
Coordinated salary data reporting will be required across corporate subsidiaries to comply with aggregated compensation requirements tied to the expanded $1 million executive compensation threshold for excise tax. “Companies that have executives in multiple subsidiaries will need to provide aggregate details about all of those individual salaries, as opposed to analyzing subsidiaries separately,” said Chatrane Birbal, the vice president of public policy and government relations at the HR Policy Association. “If different subsidiaries are on different systems and they need to do data analysis across different platforms, it can become cumbersome. They need to pay attention to this. If they don’t get it right, they’ll have to pay a tax penalty.” Check with vendors about certain process requirements, such as if payroll systems will flag phase-out thresholds automatically or if employees will be required to self-attest, she added. In addition, touch base with legal and tax advisers about the types of documentation (e.g., tip estimates or overtime records) that need to be retained to substantiate deductions. Vendors and partners also can help employers better understand and comply with state-specific and industry-specific rules regarding overtime and tips, Poor said.

Benefits System Updates

According to Birbal, factor the following toward benefits systems updates:

Recognition of “bronze” and catastrophic health plans as eligible for HSAs.
Inclusion of telehealth, remote care services and direct primary care (the latter up to certain amounts) as eligible for HSA reimbursement.
Correct coding of employer payments to student loan support to avoid being taxed as wages, since the tax-free benefit is now permanent.
Adjusted eligibility rules for paid family and medical leave benefits from one year of employment to six months.
Allowing for increased (Achieving a Better Life Experience) ABLE account contribution limits.

For updates to benefits that involve annual adjustments indexed for inflation — such as student loan repayments, “Trump Account” contributions, childcare tax credits, ABLE account contributions and direct primary care HSA distributions — Turba also emphasized the importance of correctly programming those annual adjustments into your systems.

Updating Employee Handbooks and Communications

Updating HR systems isn’t enough, said Birbal. Employers may consider outlining those same changes in their employee handbooks and communications with workers — whether it’s through meetings, emails or other reach-outs — so they know what they may need to do differently, as well as how they may benefit from the changes.

Communicating those updates via multiple channels — for instance, in a revised handbook and by email — is especially important to ensure remote employees have the same access to the information, she noted.

Additionally, consider best practices for explaining the temporary versus permanent nature of different provisions, Birbal said, and look for specific ways to highlight new opportunities and need-to-know details for employees, such as enhanced communications to employees with disabilities regarding ABLE account contribution changes.

Understanding Timing and Staying Informed

As employers update their systems and processes, they should also keep the timing of various provisions in mind, Birbal said. For instance:

Overtime and tip deductions apply to earnings starting in 2025 and extend through tax year 2028.
HSA expansions and the executive compensation aggregation rule go into effect at the beginning of 2026.
The student loan repayment assistance tax exclusion and paid family leave credit become permanent starting in 2026.
In 2027, inflation adjustments for benefits such as student loan repayment exclusions and ABLE account contribution limits begin.

Birbal said employers can look to:

The Internal Revenue Service (IRS) and U.S. Department of the Treasury for updates to official regulations, forms and implementation guidance;
The U.S. Department of Labor for clarifications on FLSA-qualified overtime;
Payroll and benefits vendors for implementation and system updates; and,
Tax and legal advisers for tailored compliance strategies.

The Importance of Action

According to Birbal, failing to update your systems accordingly could lead to tax penalties, additional tax liability, overpayment of taxes or lost access to permanent tax credits.

In addition, she said, “Employees may miss out on tax savings if systems aren’t updated, undermining trust and morale.”

Birbal also noted communicating directly with employees about how those changes impact them is a strategic workforce move.

“In today’s labor market, employees increasingly expect employers to not only meet regulatory requirements but to also offer benefits that reflect evolving needs — whether related to financial well-being, healthcare access or work-life balance,” she said. “Organizations that fall behind in updating or expanding their offerings risk being viewed as outdated and unresponsive. ... In contrast, companies that quickly align their systems and policies with new benefits provisions will position themselves as forward-looking, responsive to employee needs and, ultimately, an employer of choice in a highly competitive market.”

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics: