The One Big Beautiful Bill Act (OBBBA) — signed into law on July 4, 2025 — introduces significant changes to workforce compliance, tax incentives, benefits, and reporting. While it offers valuable opportunities for employers, it also introduces new compliance pitfalls that could lead to penalties, missed credits, or legal exposure. 

This article identifies the top six compliance landmines that employers must avoid, including misaligned paid leave policies, missed plan document updates, childcare credit errors, payroll oversights, inadequate documentation, and delayed planning. It also provides actionable steps to help organizations remain compliant and leverage these regulatory changes as a strategic advantage. 

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Why Compliance Mistakes Under OBBBA Are So Costly 

With many provisions taking effect by January 1, 2026, the compliance window for employers is short. Businesses that fail to prepare risk: 

• Losing valuable tax credits like Section 45S or Section 45F. 

• Fines and penalties from the IRS or DOL for noncompliance. 

• Increased audit risk due to inconsistent documentation. 

• Operational disruption caused by last-minute changes. 

In short: proactive planning isn’t optional — it’s essential. 

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1. Misinterpreting the Paid Family and Medical Leave (PFML) Credit 

The Section 45S Employer Credit for Paid Family and Medical Leave is now permanent and more flexible, but employers must meet strict eligibility requirements. Common mistakes include: 

• Providing paid leave without guaranteeing at least 50% of regular wages. 

• Excluding employees with 6+ months of service or those working 20+ hours per week. 

• Failing to include anti-retaliation and non-interference clauses in written policies. 

• Miscalculating credit amounts by including state-mandated leave (which qualifies for eligibility but not the credit itself). 

How to stay compliant: 

• Conduct a full policy review and ensure written policies meet all updated criteria. 

• Document leave approvals, wage payments, and employee eligibility in a centralized system. 

• Consult with a tax advisor before claiming the credit. 

Learn more about the Section 45S Credit (IRS) 

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2. Failing to Update Cafeteria Plans and Dependent Care Documents 

The Dependent Care FSA contribution limit increases from $5,000 to $7,500 starting in 2026. But simply offering the higher limit isn’t enough — employers must formally update their Section 125 cafeteria plan documents. 

If documents aren’t updated before the new plan year: 

• The increased contribution may be disqualified from tax-favored status. 

• The company could face IRS penalties. 

• Employees may face unexpected tax liability. 

How to stay compliant: 

• Update Section 125 plan documents before the 2026 plan year. 

• Review nondiscrimination testing requirements with benefits counsel. 

• Communicate new contribution limits to employees during open enrollment. 

IRS Guidance on Dependent Care Assistance Programs 

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3. Overlooking Childcare Tax Credit Requirements 

The enhanced Employer-Provided Childcare Credit (Section 45F) offers up to 40% of qualified expenses — or 50% for small businesses — with increased caps. But many employers fail to qualify due to documentation errors or misunderstanding eligibility requirements. 

Common mistakes: 

• Misidentifying what counts as a “qualified childcare facility” or “qualified provider.” 

• Failing to track and document all qualifying expenses. 

• Missing opportunities to leverage contracted third-party childcare services. 

How to stay compliant: 

• Review IRS definitions of qualified childcare expenses and facilities. 

• Implement expense-tracking procedures before January 1, 2026. 

• Consider partnering with third-party childcare providers to expand eligibility. 

Section 45F Overview – IRS 

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4. Missing Payroll and Tax Updates 

Several payroll-related changes under OBBBA take effect in 2025–2026, including: 

• A new deduction for qualified overtime pay (up to $12,500 or $25,000 for joint filers). 

• Adjusted Form 1099-MISC and NEC reporting thresholds. 

• Expanded HSA eligibility to include “bronze” and “catastrophic” plan enrollees. 

How to stay compliant: 

• Coordinate with your payroll provider now to ensure systems are updated. 

• Adjust internal reporting workflows to align with new thresholds. 

• Provide employee education on new deductions and eligibility options. 

Tax Foundation: OBBBA Tax Impacts 

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5. Inadequate Documentation and Recordkeeping 

With increased credits and deductions comes increased IRS scrutiny. Employers must retain thorough documentation to support claims, including: 

• Written policies 

• Payroll and timekeeping records 

• Benefit plan documents 

• Eligibility determinations and employee communication records 

How to stay compliant: 

• Implement a document retention policy aligned with federal requirements (typically 4+ years). 

• Centralize compliance records for easier audit readiness. 

• Train HR, payroll, and finance staff on updated documentation protocols. 

Department of Labor – FMLA and Recordkeeping Requirements 

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6. Waiting Too Long to Act 

The most common — and most costly — mistake employers make is waiting until late 2025 to act. Updating policies, systems, and communications often takes months — and last-minute changes can trigger compliance failures. 

How to stay compliant: 

• Create a compliance timeline with clear milestones for Q4 2025 and Q1 2026. 

• Assign internal owners for each major deliverable. 
• Schedule quarterly reviews to track progress and adjust plans as guidance evolves.

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Frequently Asked Questions: The BIG, Beautiful Bill

Does OBBBA require employers to provide paid family and medical leave?

No. The bill does not mandate paid leave, but it makes the Section 45S tax credit permanent for employers that voluntarily offer qualifying paid family and medical leave.

When do most of the changes take effect?

Most provisions — including the expanded Section 45S credit, increased Dependent Care FSA limit, and enhanced childcare tax credits — take effect on January 1, 2026. However, some payroll and tax provisions (like the overtime deduction) begin in 2025.

Can state-mandated leave count toward the PFML credit?

Yes. State-mandated leave can count toward eligibility for the credit. However, it does not count toward the amount used to calculate the tax credit itself.

What documentation should employers keep to stay compliant?

Employers should retain written policies, payroll records, benefit plan documents, eligibility records, and documentation of qualifying expenses for at least four years in case of IRS or DOL audits.

What is the biggest compliance risk for employers?

The most significant risk is waiting too long to act. Delayed updates to policies, systems, and documentation can lead to missed tax credits, compliance violations, and costly penalties.

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Final Thoughts: Turn Compliance Risk Into Competitive Advantage 

The One Big Beautiful Bill Act is more than a legislative update — it’s a shift in how employers must approach workforce strategy, benefits, and compliance. The companies that treat this as a strategic initiative — rather than a checklist exercise — will not only avoid costly mistakes but also gain a competitive edge. 

By planning early, aligning policies, training teams, and documenting thoroughly, employers can minimize risk, capture significant tax savings, and improve employee satisfaction — all before January 1, 2026. 

Next in the Series: In Part 3, we’ll explore the specific leave law, benefits, and tax credit changes in depth — and how they’ll shape your workforce strategy for years to come. 

Partner with MP to Stay Ahead 

MP’s team of SHRM-certified compliance experts helps businesses build proactive strategies, prepare documentation, and stay ahead of legislative changes like OBBBA. Contact us today to schedule a compliance consultation. 

 

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