Tricky Compliance Issues for Companies When an Executive Terminates Employment: 409A Applicability to Severance
Executive employment relationships are rarely permanent. When an executive or other senior-level employee terminates employment, companies often must deal with difficult tax, equity, and benefits issues that arise in connection with the employee’s termination.
This article is the second in a series of articles that address important compliance pointers for structuring post-termination benefits or addressing issues and considerations for companies when an executive terminates employment.
Last month, we discussed whether ERISA applies to your executive severance plan. This month, we are diving into the applicability of Section 409A of the Internal Revenue Code (Section 409A) to severance benefits. Specifically, this article discusses the difference between Section 409A compliant vs. Section 409A exempt severance, and how that impacts your approach to severance entitlements.
Exempt vs. Compliant Severance
Practitioners will sometimes use the phrase “409A Compliance” to refer generally to a payment arrangement that is drafted to avoid the 20% excise tax and other penalties prescribed by Section 409A. This can be achieved by either structuring payments to meet one of the exemptions in Section 409A or by structuring payments to meet all of the compliance requirements of 409A (i.e., payments can either be EXEMPT FROM or COMPLIANT WITH Section 409A). While both 409A exemption and compliance prevent the employee from adverse tax outcomes, there are certain nuances in how exempt vs. compliant payments are treated under other provisions of Section 409A. As a result, it is important to understand whether promised severance payments are intended to be 409A exempt or compliant.
409A Exemptions for Severance
There are generally two exemptions available for severance benefits: (1) the short-term deferral exemption, and (2) the separation pay plan exemption.
Short-Term Deferral
To be considered a short-term deferral, the severance payments must meet the following two requirements:
The severance is only paid upon an “involuntary separation from service” (see the section below entitled “What Qualifies as an Involuntary Separation from Service?” for more information); and
The severance is required to paid in its entirety, by its terms, no later than March 15th of the year following the year of the employee’s separation from service (or, if later, the 15th day of the third month of the company’s taxable year in which the termination occurs).
As a result, severance benefits that are payable in a single lump sum shortly after termination of employment should generally be exempt from Section 409A as a short-term deferral. However, be mindful that even when cash severance is payable in a single lump sum, other taxable benefits (such as medical insurance continuation) may be paid or provided over a period of time, and as a result, such benefits must be analyzed separately.
Separation Pay Plan
Severance payments that meet all of the following three requirements are also exempt from Section 409A under the separation pay plan exemption:
The severance is only paid upon an “involuntary separation from service.”
The total amount of severance does not exceed two times the lesser of (a) the employee’s annual compensation for the prior taxable year or (b) the IRS 401(a)(17) limit (which is US$350,000 for 2025) (the “Separation Pay Cap”).
The severance is required to be paid by its terms no later than December 31st of the second year following the year in which the separation occurs.
What Qualifies as an Involuntary Separation from Service?
For this purpose, an involuntary separation from service means that the employee either was terminated by the company when the employee was willing to continue providing services or resigned with “good reason,” provided that the good reason definition is limited to material negative changes in the employment relationship. The Section 409A regulations include a safe harbor definition of good reason that is generally prudent to follow when relying on either of the exemptions described above. (See Treasury Regulations § 1.409A-1(n)(2)(ii).) This safe harbor definition provides the conditions that can establish good reason as well as the process that the employee must follow to claim good reason (including providing the company with timely notice of the event alleged to constitute good reason and a reasonable opportunity to cure the good reason condition, and actually terminating employment within a short period of time thereafter).
Also, as a reminder, while “separation from service” generally aligns with a layperson’s understanding of termination of employment, extra attention must be given when an executive continues as a consultant or other part-time position for some transition period after their cessation of regular employment. Depending on their expected continued level of services as a consultant, their “separation from service” for purposes of Section 409A rules could either occur at their termination of employment date or at the later date when they cease to be a consultant.
Stacking Exemptions
Often, an executive’s total severance package exceeds the maximum amount permitted to be exempt from Section 409A under the separation pay plan exemption. For example, in 2025, the maximum amount of severance that can fit under the separation pay exemption is US$700,000 (i.e., twice the US$350,000 401(a)(17) limit). For higher-paid employees, often whom receive severance that is worth more than one year of base salary, it can be easy for this US$700,000 limit to be exceeded.
If such higher severance amounts are paid in installments, then can it ever be exempt from Section 409A? Potentially yes, by relying on a Section 409A concept that allows you to “stack” the short-term deferral and separation pay plan exemptions. Under this concept, you can treat the portion of the installments that will be paid during the short-term deferral period as short-term deferrals, and the remainder as separation pay. By stacking these exemptions, it is possible for more than US$700,000 of severance payments to be exempt.
409A Compliant Severance Arrangements
To the extent severance benefits are not exempt from Section 409A, then the non-exempt portion of the benefits must comply with Section 409A. This requires that:
Payments can only commence upon a “separation from service” (see note above regarding tricky situations where executives continue as a consultant after employment).
Payment dates must be specified in the agreement in an objective manner, and cannot be subject to any employee or employer discretion to change payment timing (whether directly or indirectly). Note, this may also include payment timing considerations if the executive is required to execute a release of claims to receive severance benefits and the release consideration period could span between two calendar years.
With limited exceptions, there must be a single payment schedule for all separations from service to comply with Section 409A’s “anti-toggling” rules.
If the executive is a “specified employee” within the meaning of Section 409A (generally, one of the top 50-paid officers of a publicly traded company), then the non-exempt severance pay must be delayed for at least six months after the executive’s separation from service.
Although the most common scenario when severance must comply with Section 409A is when the severance is paid in installments and exceeds the Separation Pay Cap (even with utilizing any “stacking” of the short-term deferral exemption with the separation pay plan exemption), the other time the exemption can be lost is when the definition of “good reason” is too executive-friendly, e.g., the executive can trigger terminating employment for good reason on one or more circumstances that is not considered a material adverse change to the executive’s working conditions. In this latter event, none of the severance pay would qualify for any Section 409A exemption because the severance pay would not be considered to be paid due to an “involuntary separation from service” as Section 409A defines it.
Differences Between Exempt vs. Compliant Severance
As noted above, while both 409A exempt and 409A compliant severance avoids the 20% penalty tax, there are meaningful differences between how exempt vs. compliant severance is treated under other Section 409A rules. Specially, if severance is exempt from Section 409A, then:
The severance payments can be accelerated without penalty. For example, severance that is originally required to be paid in installments, but is exempt under the separation pay plan exemption, can be accelerated and paid in a lump sum without causing problems under Section 409A.
The severance package may be able to be replaced with a new arrangement with different payment terms without a Section 409A “substitution” risk that is inherent when 409A compliant arrangements are replaced.
The six-month delay that applies to specified employees at public companies does not apply to exempt severance.
In practice, the first two bullets above can be especially invaluable because it is not uncommon for either the executive or the company to want to renegotiate severance terms at some point during the employment relationship or at the time of a separation. So, parties typically prefer to structure severance as exempt from Section 409A to the extent possible for maximum flexibility down the road. And, if you are currently facing an executive separation and severance obligations, make sure to confirm whether your severance is exempt from, or complies with, Section 409A before agreeing to any changes in the payment terms.
Understanding the Federal Reconciliation Bill’s Implications for MCO Tax Structure
New York’s Medicaid financing strategy—particularly its use of a managed care organization (MCO) tax—has come under renewed federal scrutiny amid recent legislative proposals and regulatory developments. The federal reconciliation bill, known as the One Big Beautiful Bill Act (OBBBA), alongside newly proposed guidance from the Centers for Medicare & Medicaid Services (CMS), could significantly influence how New York and other states structure healthcare-related tax mechanisms used to draw down federal Medicaid matching funds.
Section 44132 of the OBBBA would establish a ten-year moratorium on the creation or expansion of provider and MCO taxes. Under this proposal, states would be prohibited from adopting new healthcare-related taxes or increasing existing ones unless they were enacted before the effective date of the legislation. Even if a tax complies with federal requirements—such as being broad-based, uniformly applied, and not directly redistributive—it would remain frozen at its current structure for the duration of the moratorium.[1]
This legislative action is reinforced by CMS’s proposed rule issued in April 2025, which would increase scrutiny of waiver requests for narrowly tailored provider taxes. The CMS fact sheet outlines how the rule aims to ensure that such taxes do not disproportionately benefit the providers who fund them and that they meaningfully redistribute costs across a provider class. CMS signaled that future approvals would be based not only on statistical compliance with redistribution formulas, but also on substantive evidence that the taxes are not structured to guarantee repayments through Medicaid.
New York’s FY 2025 budget projected approximately $3.7 billion in revenue from its MCO tax, intended to support Medicaid program enhancements, including base rate adjustments and targeted payments to providers. However, according to CMS correspondence and discussions shared at the May 2025 MACPAC meeting, the federal government is expected to approve only about $2.1 billion in matching funds under current policy standards.
This shortfall has triggered a review by New York State officials, with reports indicating that the state may need to restructure or replace components of the MCO tax mechanism. As of June 2025, the New York State Department of Health has not issued updated guidance or notifications to providers regarding potential changes to reimbursement or supplemental funding. However, news coverage and budget briefing materials confirm that the Governor’s Office is working with CMS and legislative leaders to evaluate options for FY 2026 and beyond.
New York is not alone. States such as California, Michigan, and Pennsylvania are also assessing their provider tax frameworks in response to tighter federal standards and the proposed legislative freeze. Many of these states have historically used targeted healthcare-related taxes as tools to secure additional federal funding for Medicaid. Under the OBBBA and new CMS rules, these strategies will require greater alignment with redistributive principles and transparency requirements.
For context, the foundational rules governing provider taxes appear in 42 U.S.C. § 1396b(w) and are implemented through 42 C.F.R. § 433.68. These rules require taxes to apply across a broad base of providers, to be uniformly imposed, and not to disproportionately benefit any one group of taxpayers. The reconciliation bill does not change those standards—it simply imposes a statutory moratorium on modifications that could otherwise have been evaluated under the existing waiver process.
For providers operating in New York, the practical effects of these developments are not yet fully known, but preparation is prudent. Providers may wish to monitor announcements from the New York Department of Health, reassess their current funding assumptions, and evaluate how federal match uncertainty could affect supplemental payments. While reimbursement changes have yet to be implemented, the alignment of federal legislation and administrative rulemaking indicates that states may soon face binding constraints on Medicaid financing flexibility.
As guidance evolves and legislative proposals move forward, healthcare providers, Medicaid plans, and other stakeholders should prepare to navigate these changes.
FOOTNOTES
[1] Proposed in legislative summaries; pending bill text.
GeTtin’ SALTy Episode 55 | California Property Tax Update: The Supreme Court Tackles the Local Tax Subsidy Case [Podcast]
In this episode of GeTtin’ SALTy, host Nikki Dobay is joined by fellow Greenberg Traurig Shareholders Brad Marsh and Colin Fraser for a comprehensive catch-up on California property tax developments as Q2 2025 draws to a close.
The discussion covers key legislative updates, including the impending expiration of the state’s solar energy facility exclusion and ongoing reforms to the parent-child exclusion under Proposition 19.
The main event is a deep dive into the high-profile Olympic and Georgia Partners v. County of Los Angeles case, recently argued by Colin before the California Supreme Court.
The team unpacks the complex questions at stake: whether transient occupancy tax subsidies and hotel “key money” are taxable as real property, and whether the widely used Rushmore valuation approach holds up under legal scrutiny.
The conversation highlights the broader implications for taxpayers and local governments and offers a behind-the-scenes look at oral arguments and legal strategy.
The episode wraps with a superpower debate and a look ahead to the court’s forthcoming decision.
Supreme Court Unanimously Sides with Catholic Charities in Wisconsin Unemployment Tax Exemption Case
On June 5, 2025, the United States Supreme Court (the “Court”) unanimously ruled in Catholic Charities Bureau, Inc. v. Wisconsin Labor and Industry Review Commission that a Catholic charity group was entitled to a tax exemption from the state’s unemployment fund, and that interpreting the statutory language to the contrary, as the lower court (defined below) decision did, would violate the First Amendment.
This decision overturned the ruling of the Wisconsin Supreme Court (the “lower court”) that denied tax exemption based on the nature of the group’s activities as being “secular in nature, not religious,” holding that the decision below resulted in unconstitutional “denominational discrimination.” Justice Sotomayor delivered the majority opinion. Justice Thomas and Justice Jackson separately concurred.
Background
Under Wisconsin law, employers are required to pay into the state’s unemployment compensation program through payroll taxes.[1] There is an exemption for certain nonprofit organizations, including religious employers that are “operated primarily for religious purposes” and “operated, supervised, controlled, or principally supported by a church or convention or association of churches.”[2]
Petitioners in the case include the Catholic Charities Bureau, a nonprofit affiliate of the Roman Catholic Diocese of Superior, and its four sub-entities. They provide charitable services to local communities in Wisconsin, such as employment training and daily assistance to people with disabilities. They do not engage in “proselytization,” and they employ and serve people of all religious faith.
Petitioners sought a tax exemption under the relevant provisions and were rejected for not being “operated primarily for religious purposes.” The lower court affirmed the rejection, stating that petitioners’ activities are not typically religious because, among other things, they did not restrict charitable services to Catholics, nor did they attempt to proselytize or engage in any other activities that were not secular in nature.
The Decision
The Court unanimously overturned the lower court, in an opinion written by Justice Sotomayor. The Court concluded that the lower court’s interpretation granted “denominational preference” to religious organizations based on theological practices—such as whether to proselytize as part of the provision of other services or whether to only serve co-religionists. This “denominational discrimination” among religions, the Court reasoned, was presumptively unconstitutional under longstanding precedent under the religion clauses of the First Amendment, and could only be upheld if justified by a compelling governmental interest and if the discrimination was closely fitted to further such interest[3]—a test that the Wisconsin Labor & Industry Review Commission failed to meet.[4]
Justice Thomas and Justice Jackson both had separate concurring opinions. Justice Thomas’s opinion criticized the lower court’s conclusion that the Catholic Charities organization should be viewed as separate from the associated Catholic Diocese of which they are a part. Justice Jackson’s opinion agreed with the Court’s opinion with respect to the application of the “denominational discrimination” test to the decision below, but wrote to explain her views as to the reading of the similar exemption under the Federal Unemployment Tax Act (“FUTA”). Justice Jackson argued that a pure functional analysis of the relevant tax exemption was appropriate. In other words, it is entirely appropriate to analyze what an organization does to determine the eligibility for the relevant tax exemption, regardless of its motive or inspiration. Although not entirely clear, it is possible that Justice Jackson would agree that organizations such as the petitioners here could be denied tax exemptions under FUTA as long as organizations with other theological approaches (such as more active proselytization) were also denied tax exemptions.
Discussion
Given the very specific and narrow tax exemptions at issue, and the particularities of the lower court’s decision with respect to the lines it was drawing with respect to different types of religious organizations, it is possible that the opinion in this case will have a relatively narrow impact. The opinion does emphasize, at the very least, that when analyzing the scope of religious exemptions or religion-specific tax provisions, courts and practitioners need to be aware that drawing lines that benefit certain theological traditions over others could bear special scrutiny. A parsonage allowance with a limited scope only applicable to the ministers of certain religious traditions, or a real property exemption that only applies to religious land usages that have specific theological features, could be subject to searching review. That said, it is always difficult to predict how the Court will apply the principles of a decision interpreting the First Amendment in other cases with substantially different facts.
Summer Associate, Zhizhou (Josie) Liu, assisted with writing this post.
[1] Wis. Stat. §108.17-18.
[2] Wis. Stat. §108.0215(h)(2).
[3] Larson v. Valente, 456 U. S. 228, 246–47 (1982); Epperson v. Arkansas, 393 U. S. 97, 106 (1968); Zorach v. Clauson, 343 U. S. 306, 314 (1952).
[4] The Court noted that Wisconsin could not explain why an organization which did not proselytize and served all-comers was more at-risk to leave employees without unemployment benefits as compared to an organization that did so. Wisconsin’s exemption was also found to be underinclusive: organizations that did the same work as the petitioners but directly by a church or the ministers itself could be exempted. Additionally, the exemption did not draw distinctions between religious and non-religious employees, which was further evidence of the lack of a close fit between asserted government interest and the scope of the exemption.
Senate Updates Code Section 899
On Monday, 16 June 2025, the Senate Finance Committee released its version (the Senate Proposal) of the Section 899 retaliatory tax provisions that also are included in the “One Big Beautiful Bill Act” (the Act) that was passed by the House of Representatives on 22 May 2025.1 The Senate Proposal contains significant changes (in both form and substance) from the House-passed provision (House Proposal). For a discussion of the House Proposal and the impact it would have on certain cross-border transactions, see our previous alert.
Significant Changes in US Senate Proposal
Below is a summary of certain significant changes to Code Section 8992 in the Senate Proposal.
Delayed Start Date
Under the House Proposal, Code Section 899 would apply to calendar year taxpayers starting in 2026. Under the Senate Proposal, Code Section 899 would apply to calendar year taxpayers starting in 2027.
Lower Increased Rates of Tax
Under the House Proposal, the US tax rates to which an “applicable person” is subject would increase by five percentage points per year, up to a maximum of 20 percentage points above the applicable statutory rate (determined without regard to a reduced rate). Under the Senate Proposal, the US tax rates to which an “applicable person” is subject would increase by five percentage points per year, up to a maximum of 15 percentage points above the rate to which the applicable person would otherwise be subject (which may be a reduced rate). For example, an applicable person that is eligible for a 0% tax rate under a US tax treaty would (assuming Section 899 overrides the 0% treaty rate) be subject to a maximum US withholding tax rate of 50% under the House Proposal, which is reduced to a maximum US withholding tax rate of 15% under the Senate Proposal.
Fewer Exclusions Survive Code Section 899
Under the House Proposal, certain statutory tax exemptions and exclusions, such as the portfolio interest exemption, would not be impacted by Code Section 899. Under the Senate Proposal, while certain enumerated exemptions and exclusions, notably including the portfolio interest exemption, are not impacted by Code Section 899, any exemptions or exclusions not enumerated may be impacted. This calls into question the viability of numerous existing tax exclusions and exemptions for which applicable persons may be eligible, such as (1) exclusions under income tax treaties (such as a prohibition on the taxation of interest income by the United States and exclusions appliable to certain categories of foreign treaty residents) and (2) the exclusion for FIRPTA gains afforded to qualified foreign pension plans (QFPFs).
Certain Unfair Foreign Taxes No Longer Trigger Increased US Tax Rates
Under the House Proposal, applicable persons with respect to any country that enacted an “unfair foreign tax” (referred to as a discriminatory foreign country) would be subject to increased US tax rates. An unfair foreign tax included an undertaxed profits rule (UTPR) tax, a diverted profits tax (DPT), a digital services tax (DST), and certain other taxes identified by the Secretary of the Treasury. Under the Senate Proposal, countries whose applicable persons are subject to increased US tax rates would include only those countries that have enacted an “extraterritorial tax” (which generally includes a UTPR tax but does not include a DPT or a DST). However, the Super BEAT provisions discussed below would apply to any “offending foreign country,” that is, any country that has enacted any unfair foreign tax, including a UTPR tax or a DST (a DPT is not a per se unfair foreign tax under the Senate Proposal). See our previous alert for a list of countries imposing one or more of these taxes.
Changes to Super BEAT
Under the House Proposal, the 3% BEAT base erosion payments threshold would have been eliminated entirely for US corporations majority-owned by applicable persons. Under the Senate Proposal, the BEAT base erosion payments threshold is retained, but (1) is reduced to 0.5% for US corporations that are majority-owned by applicable persons, and (2) is reduced to 2% for all other US corporations. In addition, whereas the House Proposal would have established a higher Super BEAT tax rate under Code Section 899, the Senate Proposal increases the BEAT tax rate under Code Section 59A to 14% for all taxpayers (regardless of ownership by applicable persons). The Senate Proposal also adds a “high-tax” exception to base erosion payments under the regular BEAT that is not applicable to taxpayers subject to the Super-BEAT.3
In summary
The Senate Proposal is less disruptive than the House Proposal in certain respects, including the deferral of its effective date of Code Section 899 by one year and the lower cap on US tax rate increases (15 percentage points above the US tax rates that would otherwise be applicable, compared with 20 percentage points above US statutory tax rates without regard to any reduction in rate in the House Proposal). Notwithstanding the foregoing, the Senate Proposal (like the House Proposal) would have a significant impact on investment and operations in the United States by applicable persons. It would also override significant exemptions and exclusions under the Code that were thought to have been unaffected by the House Proposal, such as the exemption for QFPFs from FIRPTA gains.
Next Steps
There are several procedural and political hurdles for Congress to clear before Section 899 becomes law.
As has become the norm for recent landmark tax legislation when one Party controls the White House and both chambers of Congress, the Act is being considered under the reconciliation process. Reconciliation provides a statutory relief from the normal filibuster and cloture process for Senate debate, effectively overriding a requirement of a sixty-vote majority to pass legislation through the Senate.4 Instead, a simple majority vote in the Senate is sufficient to pass budget reconciliation legislation. In exchange for this “privileged” status, such legislation is limited to provisions with a budgetary impact and is subject to restrictions called the Byrd Rule.
The Senate Proposal currently is undergoing the “Byrd Bath,” where the minority Party challenges certain provisions as “extraneous” and in violation the Byrd Rule, with the Senate Parliamentarian ruling on these challenges. The Section 899 proposal is expected to be challenged under this procedure.
There are several ways that a provision may be considered extraneous, including (i) if it addresses an item outside the jurisdiction of the committee that is responsible for the provision or (ii) if it produces changes in revenue or spending which are merely incidental to the non-budgetary components of the provision (i.e., its budgetary impact does not substantially outweigh its policy implications).5
Section 899 has already survived one Byrd Rule challenge, with the Parliamentarian ruling that it rightly falls under the jurisdiction of the Senate Finance Committee and not the Foreign Relations Committee, the body generally tasked with issues impacting US treaty obligations. An additional challenge is expected on the grounds that Section 899 is primarily a policy proposal intended to backstop President Trump’s tariff policy rather than a budgetary measure. A ruling is expected later this week.
For the Act to become law, the House and the Senate must agree on the same bill. If the proposal survives the Byrd Rule challenge and passes the Senate in its current form as part of the complete Act, the House must either pass an identical version of the Act or revise the bill and return it to the Senate to reconsideration. Section 899 may be revised as part of this process, but it is expected to be included in final legislation. Both chambers hope to pass the Act in time for a 4 July 2025 signing ceremony by President Trump. Although discussions are ongoing among the White House, House, and Senate, given the significant differences between the House and Senate versions as they currently exist, reaching consensus that quickly may not be viable. A more realistic timeline may be to approve the legislation before the August recess.
Footnotes
1 Chairman Crapo Releases Finance Committee Reconciliation Text, June 16, 2025, available at https://www.finance.senate.gov/chairmans-news/chairman-crapo-releases-finance-committee-reconciliation-text.
2 Section 899 is not currently a section of the Internal Revenue Code of 1986, as amended (the Code). References to Code Section 899 herein are to such section as set forth in the House Proposal and Senate Proposal.
3 The US Senate Proposal contains other noteworthy revisions to US international tax provisions that are outside the scope of this alert.
4 See Standing Rules Of The Senate, R. XXII, S. Doc. No. 113–18 (2013).
5 2 U.S.C. § 644(b)(1), Extraneous matter in reconciliation legislation. Other limitations include (i) where the provision does not produce a change in government spending or revenues; (ii) if the net effect of provisions reported by the committee overseeing the provision fails to achieve its reconciliation instructions; (iii) the provision increases the deficit beyond the 10-year reconciliation window; or (iv) if the provision makes changes to Social Security.
McDermott+ Check-Up – June 18, 2025
THIS WEEK’S DOSE
Senate Finance Committee Releases Reconciliation Text. The language is subject to change as negotiations continue and the Byrd rule process plays out.
CMS Releases MA Risk Adjustment Audit Methodology for Payment Year 2019. The risk adjustment process aims to recover overpayments made to Medicare Advantage (MA) plans.
Federal Court Rules Against NIH in Grant Termination Cases. The decision comes as lawmakers and stakeholders express concerns over pauses or terminations in fiscal year 2025 National Institutes of Health (NIH) grant funding.
SCOTUS Upholds Tennessee Law Prohibiting Gender-Affirming Care for Minors. The Supreme Court of the United States (SCOTUS) ruling comes as the Trump Administration and Congress are seeking to limit certain federal funding of gender-affirming care.
CONGRESS
Senate Finance Committee Releases Reconciliation Text. On June 16, 2025, the Senate Finance Committee released its portion of the budget reconciliation bill. The section-by-section summary is available here. The text includes the majority of healthcare provisions being considered as part of the reconciliation process, because the Finance Committee has jurisdiction over Medicaid, Medicare, and the Affordable Care Act (ACA). The text includes some of the same provisions as the House-passed bill, while removing or making significant changes to other key provisions. The Senate text goes further than the House-passed bill on Medicaid provider taxes and state directed payments (SDPs). Some Senate Republicans have expressed concern about these provisions, including Sens. Hawley (R-MO) and Murkowski (R-AK), who have both raised concerns about Medicaid cuts this year.
Major changes compared to the House-passed bill include:
Medicaid Provider Taxes. Provider taxes would be frozen at current rates, but starting in 2027, Medicaid expansion states would see their hold harmless threshold incrementally decrease from 6% to 3.5% by 2031. The text includes exceptions for provider taxes on nursing homes and intermediate care facilities in expansion states.
SDPs. The House-passed bill grandfathered in existing Medicaid SDPs, but the Senate bill would reduce existing SDP payment limits in all states by 10% annually until they reach their specified payment limit. The payment limit for all SDPs in non-expansion states would be 110% of the Medicare rate, and for expansion states it would be 100% of the Medicare payment rate.
Medicare. The only Medicare provision in the Finance Committee text is the provision limiting Medicare coverage for certain non-citizens. The Finance Committee removed other House-passed Medicare provisions, including the provision to reform Medicare physician payment.
Other Missing Provisions. The Senate bill does not include the delay of disproportionate share hospital payment reductions, any of the health savings account provisions, or the codification of the proposed ACA program integrity rule (although rumors persist that it may reappear).
It remains to be seen if this package, which has significant differences from the House-passed version, would get 51 votes in the Senate as written, given concerns about the Medicaid provisions and non-health-related tax policies. However, the package is subject to change as negotiations continue. The “Byrd bath” process is also happening, and provisions may be struck or modified to comply with the Byrd rule.
Majority Leader Thune (R-SD) has reiterated his plan to bring the reconciliation package to the Senate floor next Wednesday or Thursday. That could be delayed as senators react to the package and negotiations continue. And, after Senate passage, the bill will need to pass the House again before it can go to the president for his signature. President Trump and Senate leaders continue to push to have the Senate complete consideration of the bill before the July 4 recess. However, this is a self-imposed deadline and if it slips past that date, Congress will continue their work in July. In fact, Vice President Vance acknowledged at a Senate meeting this week that the August recess is the real deadline.
ADMINISTRATION
CMS Releases MA Risk Adjustment Audit Methodology for Payment Year 2019. The Centers for Medicare & Medicaid Services (CMS) released the methodology for payment year (PY) 2019 risk adjustment data validation (RADV) audits. CMS selected 45 MA contracts for those audits. The methodology provides additional information about the criteria used to select enrollees for audit, instructions for submission of medical records, and details on how CMS will calculate extrapolated overpayment amounts. This follows a May 2025 announcement that CMS will accelerate RADV audits for PYs 2018 to 2024 to recoup overpayments made to MA plans. In related news, the US Department of Health and Human Services (HHS) Office of Inspector General updated its work plan that notes forthcoming reports, including one on MA health risk assessments by dual-eligible special needs plans.
COURTS
Federal Court Rules Against NIH in Grant Termination Cases. A federal judge in Massachusetts who was appointed by former President Reagan ruled in two cases that hundreds of grants terminated by NIH were illegal. The judge noted that the process of terminating the grants was arbitrary and capricious and ordered some of the grants to be restored. The cases were filed by the American Public Health Association and 16 states and mostly focused on terminations of grants related to gender identity and diversity, equity, and inclusion.
SCOTUS Upholds Tennessee Law Prohibiting Gender-Affirming Care for Minors. At the center of the case is a 2023 Tennessee law that prohibits healthcare providers from providing certain gender-affirming care services to minors. Transgender minors, their parents, and a doctor challenged the law under the Equal Protection Clause of the Fourteenth Amendment. In the case, US v. Skrmetti, SCOTUS ruled 6 – 3 that the law does not violate the Equal Protection Clause but satisfies rational basis review, allowing the Tenneessee law to take effect.
QUICK HITS
CMS Approves Medicaid Expansion of Tribal Healthcare in Six States. The approvals in Minnesota, New Mexico, Oregon, South Dakota, Washington, and Wyoming allow Indian Health Service and Tribal clinics to provide Medicaid clinic services outside of the “four walls” of a physical clinic site, including in schools and homes. This policy was mandated in the calendar year 2025 Medicare Hospital Outpatient Prospective Payment System final rule.
FDA Announces National Priority Voucher Program. The US Food and Drug Administration (FDA) program aims to expedite drug application reviews for companies developing drugs that are in line with specific priorities, including increasing domestic drug manufacturing and addressing unmet public health needs.
House Energy and Commerce Democrats Question Kennedy on MAHA Report. In a letter, leading Energy and Commerce Democrats posed questions to HHS Secretary Kennedy on the validity of information in the recently released Make America Healthy Again (MAHA) report. Read the press release here.
House Energy and Commerce Republicans Express Concerns about Data Privacy in California Marketplace. In a letter to the executive director of California’s Health Insurance Marketplace, Covered California, the committee’s Republican leaders seek information about data management practices of the exchange. Read the press release here.
Gary Andres Confirmed as HHS Assistant Secretary for Legislation. The Senate confirmed Andres by a 57 – 40 vote, with Sens. Hassan (D-NH), Shaheen (D-NH), Warnock (D-GA), Welch (D-VT), and Whitehouse (D-RI) joining Republicans in voting yes. Andres formerly worked at the House Budget Committee.
NEXT WEEK’S DIAGNOSIS
Both chambers will be in session next week. Lawmakers will continue to hash out the details of the reconciliation bill before an anticipated vote on the Senate floor, which could occur as early as next week. The House Energy and Commerce Committee will hold a hearing with HHS Secretary Kennedy, and the House Ways and Means Committee will discuss digital health data. The Senate Health, Education, Labor, and Pensions Committee will hold the nomination hearing for Susan Monarez, nominated for Centers for Disease Control and Prevention director.
Congress Should Use Budget Bill to Strengthen IRS Whistleblower Program
Since it was established in 2006, the Internal Revenue Service (IRS) Whistleblower Program has dramatically bolstered the United States’ efforts to crack-down on tax fraud schemes, identify tax cheats, deter would-be fraudsters and overall shrink the tax gap. In the less than two decades the program has been in operation, it has led to the recovery of over $7 billion while conserving the IRS’s time and resources.
However, in recent years, a number of issues have begun to plague the program, as delays have ballooned while payouts to whistleblowers have shrunk down. These issues threaten to undermine a critical and cost-effective tool in the United States’ anti-tax fraud arsenal by disincentivizing insiders from coming forward and utilizing the program.
Luckily, there has been bipartisan support in Congress for fixing the issues plaguing the IRS Whistleblower Program. The provisions found in the IRS Whistleblower Program Improvement Act, introduced by Senators Chuck Grassley (R-IA) and Ron Wyden (D-OR) during the last session of Congress were included in the draft discussion of the Taxpayer Assistance and Service Act unveiled earlier this year by Senators Wyden and Mike Crapo (R-ID).
These critically needed provisions have not been included in the budget reconciliation bill currently being considered by the Senate, however.
Including the reform provisions of the IRS Whistleblower Program Improvement Act in the budget bill will encourage and increase reporting to the IRS Whistleblower Program, leading to greater recoveries and enabling the IRS to be more efficient in their investigations with fewer resources.
Power of the IRS Whistleblower Program
Shortly after it was established in 2006, the Internal Revenue Service (IRS) Whistleblower Program demonstrated its potential to revolutionize the United States’ efforts to crack down on tax fraud and shrink the tax gap.
The monetary awards and protections offered by the program shifted the calculus for tax whistleblowers across the globe. Suddenly, the benefits of reporting tax fraud to U.S. authorities outweighed the benefits of keeping quiet and aiding in the fraud. Tax whistleblowing became a rational economic activity for bankers and other insiders.
Most notably, in 2009, UBS banker Bradley Birkenfeld came forward and blew the whistle on a major offshore banking scheme to hide U.S. taxpayer funds in Switzerland. While Birkenfeld came away with a record $104 million award, the benefits for the United States were even larger. According to University of California Davis law Professor Dennis Ventry:
“Thanks to [the] whistleblower . . . the U.S. government (take a deep breath) received: $780 million and the names of 250 high-dollar Americans . . . another 4,450 names and accounts of U.S. citizens . . . 120 criminal indictments of U.S. taxpayers and tax advisors . . . the closure of prominent Swiss banks . . . $5.5 billion collected from the IRS Offshore Voluntary Disclosure Program (OVDP), with untold tens of billions of dollars still payable . . .”
Overall, whistleblowers reporting under the IRS Whistleblower Program have directly allowed the United States to recover nearly $7 billion while the program’s deterrence effect has led to the payment of billions of dollars more in taxes from those who would be otherwise inclined to cheat the tax system but are wary of a whistleblower coming forward. A study of the similarly structured tax whistleblower award provisions within New York state’s False Claims Act found that that tax whistleblower program brought in an extra 7.7% in state tax revenue and that firms reduced their state tax avoidance in response both to the passage of the law and to press releases about tax whistleblower settlements.
“These whistleblower laws do work, and they’re reasonably inexpensive from a government perspective,” says Aruhn Venkat, one of the study’s authors and assistant professor of accounting at Texas University’s McCombs School of Business.
Crucially, the IRS Whistleblower Program helps the IRS be more efficient with its enforcement efforts and focuses its efforts on large tax cheats, since the program only covers matters where the amount of taxes in dispute exceeds $2 million. Whistleblowers come forward, identify bad actors, and provide valuable evidence about tax fraud. This allows the Commission to focus its efforts on recovering taxpayer funds from these high net-worth bad actors and not chase down the rabbit-hole of seeking enforcement avenues among the majority of honest taxpayers.
Recent Issues
The IRS Whistleblower Program’s recent annual reports to Congress detail a program facing issues. The annual money recovered by the program fell from $1.44 billion in Fiscal Year 2018 to just $245 million in Fiscal Year 2021 and the agency’s payouts to whistleblowers dropped from $312 million to $36 million over those same years.
In recent years, those totals have rebounded from those 2021 lows but still fall short of the numbers from 2018 and preceding years. In FY 2023, the IRS awarded $88.7 million to whistleblowers based on the $337 million the agency was able to collect thanks to whistleblower disclosures.
Even more troubling are the statistics on the average processing time for whistleblower award claims. The time to process mandatory award payments is up to an average of 11.29 years and there is a total backlog of 30,135 cases.
These delays are troubling, not just for the hardships they cause whistleblowers, but because of the way in which the disincentive would-be whistleblowers from coming forward. In 2006 (before the IRS whistleblower law was modernized), the Treasury Inspector General for Tax Administration raised concerns in a report that the average 7 1/2 year processing time for awards was undermining awards’ effectiveness as an incentive.
“If the claims are not timely processed, the rewards may lose some of their motivating value,” the TIGTA report stated. It further noted that cutting processing time “would make the Program more attractive to future informants wishing to report violations of tax laws.”
In recent years, the IRS Whistleblower Office has worked hard to address the issues plaguing the program, including increasing staffing at the office, disaggregating whistleblower claims to speed up award payouts, and demonstrating more dedication to working alongside whistleblowers and their representation.
While these administrative actions have made an impact, Congressional action is still urgently needed on the issue.
Critical Reforms
The whistleblower provisions found in the IRS Whistleblower Improvement Act and Taxpayer Assistance and Service Act directly address a number of the major issues plaguing the program through technical but common-sense reforms which fully align with the original intent behind the program.
The reforms include:
Imposition of interest on delayed awards. In order to reduce the debilitating delays in the processing of whistleblower award claims, the bill imposes a fairly modest interest payment onto whistleblower awards which the IRS delays at least 1 year in issuing.
Institution of de novo review in award case appeals. The bill gives whistleblowers a realistic opportunity to oppose an illegal or improper denial of an award. Under the amendment, if the IRS denies an award, the whistleblower can challenge the denial in Tax Court under the de novo standard of review. This simply means that the whistleblower can conduct discovery and can learn the actual basis for a denial and challenge it before an independent judge. This provision is designed to ensure that the IRS finally and properly adjudicates all whistleblower cases and will subject the IRS to accountability if they fail to implement the law as intended by Congress.
Removal of budget sequestration for whistleblower awards. The IRS program is the only whistleblower program in which an administrative agency reduces the amount of an award based on the budget sequestration rules adopted under President Obama. Applying budget sequestration to whistleblower payments is unjustifiable and results in payments below the mandatory statutory minimum award amount of 15% of the funds collected by the IRS in the relevant enforcement action. The amendments will fix that.
Other reforms in the bill include requiring more details in the IRS Whistleblower Program’s annual reports to Congress, aligning the program’s handling of attorney’s fees with other whistleblower award programs, and establishing the presumption of anonymity for whistleblowers.
A Cost Effective Program
A hurdle for the reforms’ passage has been the Joint Committee on Taxation’s (JCT) scoring of the IRS Whistleblower Improvement Act’s provisions, which suggest that the reforms would be costly and increase the budget. However, this is misleading about the cost effectiveness of the IRS Whistleblower Program and of cost-benefit of reforms making that program more effective.
Overall, the IRS Whistleblower Program has proven to be highly cost effective. Years ago, in reviewing the importance of tax whistleblowers, the IRS “estimated the IRS incurred slightly over 4 cents in cost (including personnel and administrative costs) for each dollar collected from the Informants’ Rewards Program (including interest), compared to a cost of over 10 cents per dollar collected for all enforcement programs.” A 2021 research paper estimated that “that the average whistleblower complaint at the IRS generates around $30,664 in tax revenues, and costs $590 to process.”
Furthermore, the previously discussed study on the NY State False Claims Act’s tax provisions found that the program had a 3,000 percent return on investment. A report from the U.K.’s Royal United Services Institute (RUSI) details that the Commodity Futures Trading Commission (CFTC) Whistleblower Program (a similar program to the IRS’) had “a gross operating profit of more than US$2.6 billion” over a ten year period.
The JCT scoring of the reform provisions found that the removal of budget sequestration on awards and the institution of de novo review could increase the amount awarded to whistleblowers and thus increase the costs of the program.
The scoring underestimates, however, the extent to which these reforms will make the program more attractive to whistleblowers, leading to more highly quality tips and thus increasing the funds recovered by the program.
Conclusion
An IRS Whistleblower Program which works for whistleblowers is necessary for the program to reach its full potential as an immensely cost-effective enforcement tool with an expansive deterrent effect. The technical reforms found in the IRS Whistleblower Improvement Act make the program more attractive to would-be-whistleblowers by addressing the debilitating delays and hurdles to full award payments currently plaguing the program.
By including these provisions in the One Big Beautiful Act, Congress will be increasing the ability of the IRS to recover unpaid taxes from fraudsters, bolstering the federal budget in one of the most efficient means possible.
Geoff Schweller also contributed to this article.
The Tax Court in Soroban Holds that Limited Partners Were Too Active To Be Treated As “Limited Partners” and are Subject to Self-Employment Tax
On May 28, 2025, in Soroban Capital Partners LP v. Commissioner (T.C. Memo 2025-52) (“Soroban II”), the Tax Court held the active role of limited partners in a fund manager caused them to fail to qualify as “limited partners” for purposes of section 1402(a)(13) and, therefore, the limited partners were subject to self-employment tax.[1] This is the second Soroban Tax Court case. Previously, in Soroban Capital Partners LP v. Commissioner (161 T.C. No. 12) (“Soroban I”), the Tax Court held that a functional analysis is necessary to determine whether a limited partner is a “limited partner, as such” for purposes of section 1402(a)(13). In the recent case, the Tax Court held that Soroban’s partners were not functionally acting as limited partners because the limited partners “were limited partners in name only.” Two Tax Court cases that reached similar conclusions to Soroban I and Soroban II are being appealed to Courts of Appeals.[2]
Section 1402(a)(13) excludes from self-employment tax the distributive share of income or loss from any trade or business of a partnership carried on by “limited partners, as such.” To determine whether a partner qualifies as a limited partner for these purposes, in the first Soroban case, the Tax Court determined that a functional analysis of a limited partner’s roles and responsibilities was necessary.
In the recent Soroban case, the Tax Court stressed that the test of whether a partner is a limited partner for these purposes is not based on a set number of factors, but it takes into account all relevant facts and circumstances. The Tax Court applied this test and looked to the limited partners’ role in generating Soroban’s income, their role in managing Soroban’s operations, the amount of time they devoted to Soroban, the way Soroban marketed the partners’ expertise and role in the business and the significance of the partners’ capital contributions compared to the fees Soroban charged for its services. The Tax Court concluded that Soroban’s limited partners were essential to generating the business’ income, oversaw day-to-day fund management, devoted their full time to the fund, were held out to the public as essential to the business and contributed insignificant capital relative to fees charged. These factors indicated that the partners’ capital contributions were not investment related.
Each of Soroban’s limited partners were founders and portfolio managers, made hiring decisions, managed employees and worked full time. However, only one was a “key man” and contributed capital. One did not contribute capital and was entitled to only 6.32% of profits. Nevertheless, the Tax Court held that the activities of all of Soroban’s limited partners (including the 6.32% partner) constituted more than mere passive investment for section 1402(a)(13) purposes and, thus, the partners’ income distributions were subject to self-employment tax.[3] The recent Soroban case applies the functional analysis of the first Soroban case and concludes that the limited partners were too active to be treated as limited partners for purposes of section 1402(a)(13). Unless reversed on appeal, Soroban II presents a substantial risk for active fund managers, as the Tax Court’s particular application of the functional analysis test would seem to cast substantially all active managers as ineligible for “limited partner” treatment.
[1] References to sections are to the Internal Revenue Code of 1986, as amended.
[2] Denham Capital Management LP v. Commissioner (T.C. Memo 2024-114) is being appealed in the U.S. Court of Appeals for the First Circuit; Sirius Solutions LLLP v. Commissioner (Docket No. 30118-21) is being appealed in the U.S. Court of Appeals for the Fifth Circuit.
[3] All three of Soroban’s limited partners were principals. It is possible that lower-level employees might be respected as limited partners, although the Tax Court did not provide any guidance on this point.
Jamiel E. Poindexter, Stuart Rosow & Rita N. Halabi also contributed to this article.
Is the One Big Beautiful Bill Act an Employee Benefits Crystal Ball?
Takeaways
Republicans in the U.S. House of Representatives attempt to deliver on President Trump’s campaign promises in the One Big Beautiful Bill Act (BBB or the Act), which passed the House by a razor-thin margin of 215 in favor and 214 opposed on May 22, 2025.
BBB shows favoritism of Health Savings Accounts and Health Reimbursement Account benefits, making changes to broaden their scope, increase utilization, and bolster savings.
The Act also provides a glimpse into legislative or regulatory changes that may be on the horizon for ERISA-governed plans, including standards for Pharmacy Benefit Manager compensation, contractual requirements, and disclosures applicable to government-subsidized plans.
The goal of the U.S. Senate is to pass One Big Beautiful Bill in a form on which Senators can agree, send it back to the U.S. House of Representatives, who then would have it on President Trump’s desk for signature by July 4, 2025. Time will tell whether this accelerated schedule is practical and what ultimately makes its way into federal law.
Without getting too far ahead of the legislative process and certainly staying out of the weeds of the 1,038 pages of legislative proposals, the BBB reveals fringe benefit, health and welfare benefit, and executive compensation priorities. The legislation also tips the hand of the Trump Administration, shining a light on areas in which we may see additional activity.
HSA, HRA Improvements
It is clear that House Republicans like Health Savings Accounts (HSA) and Health Reimbursement Accounts (HRA). There are pages of text aimed at expanding eligibility (including permitting Medicare-eligible enrollees to contribute to HSAs), increasing savings opportunities, allowing rollovers from other healthcare accounts, and permitting the reimbursement of qualified sports and fitness expenses. If the Act becomes law, employers offering HSA or HRA benefits will have some new bells and whistles to add to their programs.
Fringe Benefits That Make Education and Childcare More Affordable
With a focus on families and paying down student loan debt, BBB makes permanent an employer’s ability to make student loan debt repayments on a tax-favored basis under Section 127 of the tax code. BBB also enhances the employer-provided childcare tax credit, further incentivizing employers to provide childcare services to their employees. Whether the employer operates a childcare facility or pays amounts under a contract with a qualified childcare facility, BBB entices employers to add this much-needed employee benefit.
Executive Compensation Changes
The executive compensation changes baked into BBB are designed to help pay for some of the other changes. BBB expands the application of the excise tax on certain tax-exempt organizations paying compensation over $1 million (or excess parachute payments) to include former employees (think: severance). BBB also requires public companies to allocate the Internal Revenue Code Section 162(m) $1 million deduction limit among controlled group members relative to compensation when specified covered employees receive pay from those related employers.
Tax Cuts and Jobs Act Extension
A priority of President Trump, who touted extending his tax cuts during the campaign trail, BBB extends and makes permanent the Tax Cuts and Jobs Act changes. For example, BBB permanently makes qualified moving expense reimbursements taxable.
Pharmacy Benefit Manager Regulation
BBB also includes a few surprise new twists related to Pharmacy Benefit Managers (PBM). Although the legislative reforms currently focus on Medicaid and prescription drug programs subsidized by the federal government (e.g., Medicare Part D plans, including Employer Group Waiver Plans for retirees absent a waiver), it is clear that the Trump Administration and Republicans in Congress seek transparent and fair pricing of prescription drugs. These initiatives eventually may spill over to apply to ERISA-governed plans, in furtherance of President Trump’s Executive Orders advancing Most-Favored Nation prescription drug pricing and directing increased transparency over PBM direct and indirect compensation. So, the changes are worthy of note by all employers that use PBMs.
For Medicaid, BBB prohibits the “spread pricing” model in favor of “transparent prescription drug pass-through pricing model,” which essentially is cost-plus pricing. No more than fair market value can be paid for PBM administrative services.
In the case of Medicare Part D plans, BBB imposes contractual requirements limiting PBM compensation to bona fide service fees. Rebates, incentives, and other price concessions all would need to be passed on to the plan sponsor. Further, the PBM would be required to define and apply in a fully transparent and consistent manner against pricing guarantees and performance measures terms such as “generic drug,” “brand name drug,” and “specialty drug.”
Transparency also is paramount. BBB requires PBMs not only to disclose their compensation, but also their costs and any contractual arrangements with drug manufacturers for rebates, among other details.
It certainly is possible these PBM reforms are coming to an ERISA plan near you. BBB provides a roadmap for the Department of Labor’s Employee Benefits Security Administration to issue ERISA fiduciary standards, best practices, or disclosure requirements.
U.S. Senate Proposes Changes to ITC and PTC
The United States Senate Committee on Finance this afternoon released draft text of its version of the “One Big Beautiful Bill,” which is available here. Although we are continuing to review the draft legislation, at a high level the bill would initiate a phasedown of the investment tax credit under Section 48E of the Code (ITC) and production tax credit under Section 45Y of the Code (PTC) applicable to solar and wind facilities based on when construction begins.
Solar and wind facilities would be eligible for the full ITC or PTC, as applicable, if construction begins in 2025.
If construction begins in 2026, such facilities would be eligible for 60 percent of the otherwise available ITC or PTC.
If construction begins in 2027, such facilities would be eligible for 20 percent of the otherwise available ITC or PTC.
Thereafter, such facilities would not be eligible for the ITC or PTC.
For other types of eligible facilities, the draft legislation would adopt a phasedown of the ITC (including for storage facilities) and PTC beginning in 2033, which is not a material deviation from current law.
This is draft legislation only, it has not been enacted into law, and there may be further changes to the legislation before enactment.
One Big Beautiful Bill: Update on Provisions for Nonprofits
On May 22, 2025, the House of Representatives passed the One Big Beautiful Bill Act (H.R. 1, hereafter the “Revised House Bill”). The Revised House Draft Bill contains certain changes to the original bill that was released on May 12, 2025 by the House Ways and Means Committee (the “Original House Draft Bill”). As summarized in our previous blog post, there were several proposed changes in the Original House Draft Bill that would have particularly impacted nonprofits if enacted.
The Revised House Bill dropped the proposed change to treat income arising from a sale or license by a tax-exempt organization of its name or logo as “unrelated business taxable income” (“UBTI”) but retained the following provisions that would also impact nonprofits, if enacted:
For private foundations, the current 1.39% excise tax would be replaced by a tiered tax on net investment income based on the total gross value of the assets held by the foundation—the top rate reaching 10%.
For private colleges and universities, the current 1.4% excise tax on net investment income would be replaced with a tiered system based on an institution’s “student-adjusted endowment”. For such schools with a student-adjusted endowment of more than $2 million, the excise tax would be increased to 21%. The scope of “net investment income” would also be expanded to include interest income from student loans.
Income from scientific research would be exempt from UBTI only if the research is publicly available.
Nonprofits (other than “churches” or certain “church-affiliated organizations”) would have to pay tax (generally at the corporate rate of 21%) on parking facilities and transportation fringe benefits. The original Tax Cuts and Jobs Act of 2017 included a provision imposing taxes on such facilities and benefits, but that provision had been retroactively repealed in 2019.
The excise tax imposed on significant compensation paid to the 5 highest-compensated employees of an applicable tax-exempt organization would be expanded to all employees of the organization or any related person or governmental entity.
A 1% floor would be added for charitable contribution deductions made by corporations.
For a full summary of provisions from the Revised House Bill, please see our blog post here.
The Revised House Bill will be reviewed by the Senate and is subject to further revision and amendment as the budget reconciliation process continues. The changes summarized above may or may not be included in the final tax legislation. Congressional Republicans have previously stated that their goal is to have tax legislation finalized by July 4, 2025.
Energy & Sustainability Washington Update — June 2025
In a pivotal month for energy and fiscal policy, House Republicans advanced their sweeping reconciliation package, narrowly passing the bill on May 22 by a 215-214 vote. The legislation aims to make permanent the expiring tax provisions of the 2017 Tax Cuts and Jobs Act while rolling back key elements of the Inflation Reduction Act (IRA), with clean energy tax credits taking a bigger hit than many had anticipated. Despite early signs of potential bipartisan concern — most notably a letter from 21 House Republicans expressing reservations about undermining energy incentives — support for clean energy did not materialize when it counted. The House action comes amid a flurry of activity across the executive branch, with President Trump issuing a series of executive orders to bolster the US nuclear sector and federal agency leaders laying out plans to reshape energy and environmental programs. As the bill moves to the Senate, where internal GOP divisions are already surfacing, it’s unclear whether the more aggressive provisions will stick if the Senate opts for a more moderate path, leaving the broader Republican energy and budget agenda facing a critical political test.
Reconciliation Package Passes Through the House
On May 22, the House narrowly passed its reconciliation bill in a 215-214 vote, with one member abstaining. The legislation seeks to make permanent the lower tax rates established by the Republicans’ 2017 Tax Cuts and Jobs Act, which are set to expire at the end of this year. What advanced was an amended package consolidating 11 separate bills previously approved by their respective committees. Notably, the measure includes significant revisions to tax provisions tied to the Inflation Reduction Act.
Clean Electricity ITC and PTC: For those wishing to utilize the clean electricity production tax credit (45Y) and investment tax credit (48E), projects must begin construction within 60 days of the legislation’s enactment. Additionally, to maintain eligibility to receive the tax credits, the projects must be operational by December 31, 2028. This is an accelerated timeline from the one originally proposed by the House Ways and Means Committee version of the bill, which had set a 2031 deadline. Projects failing to meet these requirements would no longer be eligible for the credits.
Foreign Entities of Concern (FEOC) Restrictions are now applied to these credits. After enactment of the legislation, the credit user cannot be a specified foreign entity. One year after enactment, facilities that begin construction cannot receive material assistance from a prohibited foreign entity. Two years after enactment, the credit user cannot be a foreign-influenced entity or make an applicable payment to a prohibited foreign entity.
Immediate Elimination of these credits for solar or wind residential or rural leases.
Nuclear Carveout: Eligible advanced nuclear facilities and expanded nuclear facilities are exempted from the 60-day beginning-of-construction requirements and instead must only comply with the placed-in-service deadline on December 31, 2028.
Nuclear Power Production Credit: For 45U, the credit expires at the end of 2031.
Advanced Manufacturing Tax Credit: For 45X, production occurring after 2031 will now no longer qualify — one year earlier than current law. In addition, under the legislation, wind-energy components cease to be eligible after 2027 — five years earlier than the IRA intended.
Clean Fuel Production Credit: For 45Z, the credit’s life is extended from 2028 to 2031. Under the legislation, feedstock must be sourced exclusively from the United States, Canada, or Mexico. Credits are denied if the producer becomes a prohibited foreign entity or foreign-influenced entity.
Carbon Sequestrating Credit: For 45Q, the credit is maintained as originally written in the IRA, remaining until 2032.
Clean Hydrogen Production Tax Credit: 45V is eliminated for new projects beginning after December 31, 2025.
Electric Vehicles Credits: The Clean Vehicle Credit (30D), Used Clean Vehicle Credit (25E), Alternative Fuel Vehicle Refueling Property Credit (30C), and Qualified Commercial Clean Vehicle Credit (45W) are all eliminated for new projects beginning after December 31, 2025.
Energy Efficiency Credits: The Energy Efficient Home Improvement Tax Credit (25C), Residential Clean Energy Property Credit (25D), and Energy Efficient New Homes Tax Credit for Home Builders (45L) are all eliminated for new projects beginning after December 31, 2025.
For all the credits listed above — except the Clean Electricity ITC and PTC, which have their own, more-stringent requirements — the following FOEC restrictions now apply: After enactment, the credit user cannot be a specified foreign entity. Two years after enactment, the credit user also cannot be a foreign-influenced entity — defined by if, during the taxable year, a specified foreign entity has the authority to appoint a board member, executive officer, or similar individual; if a single specified foreign entity owns at least 10% of the entity; if multiple specified foreign entities collectively own 25% or more of the entity; or if they together hold 25% or more of its debt. Furthermore, an entity will also be considered foreign-influenced if, during the prior taxable year, it knowingly, or should have known it, made payments — such as dividends, interest, compensation for services, rents, royalties, guarantees, or other fixed and periodic payments — either amounting to 10% or more of such payments to a single specified foreign entity or 25% or more in total to multiple specified foreign entities.
Beyond tax measures, the bill claws back unobligated IRA funds from both the Department of Energy (DOE) and the Environmental Protection Agency (EPA). Specifically, the bill eliminates unused IRA credit subsidy funding, which is a key source of funding for the Loan Programs Office (LPO). While the bill preserves existing loan authority, the rescission of the credit subsidy could have significant implications for the LPO’s ability to administer its programs. It also removes a previously included — and controversial — provision that would have allowed the sale of small public land tracts in Utah and Nevada for development.
The legislation now heads to the Senate, where significant changes are expected. Republican leaders aim to pass the bill before the July 4 recess, though procedural and political hurdles could delay action beyond the mid-August deadline, which is tied to the recent $4 trillion increase in the federal debt ceiling.
With a 53-47 majority, Senate Republicans need at least 51 votes to pass the measure. However, several GOP senators have already expressed concerns. Senators Thom Tillis (R-NC), Lisa Murkowski (R-Alaska), John Curtis (R-Utah), and Jerry Moran (R-Kan.) have criticized the House bill’s rollback of IRA tax credits as too aggressive. Others, including Senators Josh Hawley (R-Mo.) and Susan Collins (R-Maine), oppose the bill’s proposed Medicaid cuts and have publicly stated they have “Medicaid red lines” they won’t cross. On the opposite end, Senators Ron Johnson (R-Wis.), Rick Scott (R-Fla.), Mike Lee (R-Utah), and Rand Paul (R-Ky.) argue the bill doesn’t go far enough in addressing deficit reduction, signaling that Senate Republicans must navigate divisions from both moderates and fiscal hardliners.
Trump’s Executive Orders on Nuclear
On May 23, President Trump announced four Executive Orders (EOs) aimed at boosting the nuclear industry:
“Deploying Advanced Nuclear Reactor Technologies for National Security” mandates the acceleration of development and use of advanced nuclear technologies by the federal government, including establishing a program for the use of nuclear energy at military installations and directing the DOE to designate sites for deploying these reactors.
“Reforming Nuclear Reactor Testing at the Department of Energy” mandates the DOE to expedite the testing and deployment of advanced reactors through streamlined processes at National Laboratories and a new pilot program outside of them, with a focus on reaching operational status for qualified test reactors and at least three pilot program reactors within specific deadlines. Furthermore, the order requires the DOE to reform its environmental review procedures under the National Environmental Policy Act (NEPA) to remove barriers to reactor development.
“Reinvigorating the Nuclear Industrial Base” emphasizes the critical need to address challenges like foreign dominance in nuclear reactor designs and a reliance on external sources for nuclear fuel. The order directs the Secretary of Energy to use the authority provided by the Defense Production Act (DPA) to seek voluntary agreements with domestic nuclear energy companies. These agreements are intended to facilitate cooperative procurement of LEU and HALEU and allow consultation to enhance spent nuclear fuel management (including recycling and reprocessing), ensure the availability of the nuclear fuel supply chain capacity, and expand the nuclear energy workforce.
“Ordering the Reform of the Nuclear Regulatory Commission” directs the Nuclear Regulatory Commission to reorganize to “promote the expeditious processing of license applications and the adoption of innovative technology.” A dedicated team of at least 20 officials will be created to draft new regulations.
Not all of this will ultimately prove realistic. For instance, the Trump administration called for 20 new Section 123 Agreements for Peaceful Nuclear Cooperation by 2028 when only 25 have been signed since 1954. The administration also set a goal of 10 new large reactors with complete designs under construction by 2030, when only two have been done in the last 40 years. Still these four EOs clearly shine a light on the administration’s goals for nuclear and the potential for revitalizing this industry.
Agency Updates
Trump’s recent executive actions align with statements made by Secretary of Energy Chris Wright during a DOE budget oversight hearing. Wright emphasized his strong support for using the DOE’s Loan Programs Office to accelerate the deployment of nuclear energy projects. He also highlighted his top priorities, which include advancing US artificial intelligence capabilities, supporting the emerging geothermal industry, and streamlining the approval process for oil, gas, and coal projects. However, on May 15, the DOE announced that it would be reviewing 179 individual awards totaling over $15 billion, starting with those at the LPO, an initiative that may run counter to Secretary Wright’s comments about using the LPO for nuclear.
During budget oversight hearings before both the House and Senate, EPA Administrator Lee Zeldin faced sharp questioning from lawmakers. Following President Trump’s “skinny budget request,” Zeldin announced plans to eliminate the EPA’s Office of Atmospheric Protection — which oversees the Energy Star program — as well as the Office of Air Quality Planning and Standards. In their place, the agency will establish two new offices within the Office of Air and Radiation: the Office of Clean Air Programs and the Office of State Air Partnerships. When pressed about the future of Energy Star, Zeldin stated he is in discussions with several private entities to take over the program, arguing that since it is not mandated by Congress, the EPA has the authority to transfer its management. However, the privatization of the Energy Star program would still likely require congressional authorization.
Meanwhile, the confirmation process for key positions across federal agencies continues to progress. In May, several appointments were finalized.
At the DOE, the following were advanced out of the Senate committees: Jonathan Brightbill to be General Counsel, Tina Pierce to be Chief Financial Officer, Wells Griffith to be Undersecretary, Brandon Williams to be Undersecretary for Nuclear Security / Administrator for Nuclear Security, Dario Gil to be Undersecretary for Science, Kyle Haustveit to be Assistant Secretary for Fossil Energy and Carbon Management, Ted Garrish to be Assistant Secretary for Nuclear Energy, Tristan Abbey to be Administrator of the US Energy Information Administration, Matthew Napoli to be Deputy Administrator for Defense Nuclear Nonproliferation, Scott Pappano to be Principal Deputy Administrator of the National Nuclear Security Administration, Conner Prochaska to be Director of the Advanced Research Projects Agency – Energy, and Catherine Jereza to be Assistant Secretary of Electricity. Timothy Walsh has been nominated for Assistant Secretary of Environmental Management and Audrey Robertson has been nominated for Assistant Secretary for Energy Efficiency and Renewable Energy. A full chart reflecting everything we know about staffing within the DOE can be found here. The chart will continue to be updated as more information becomes available.
At the EPA, Jeffrey Hall was nominated to be Assistant Administrator for Enforcement and Compliance Assurance, and John Busterud to be Assistant Administrator, Office of Solid Waste.
For Interior, nominations for Ned Mamula to be Director, US Geological Survey, Brian Nesvik to be Director, US Fish and Wildlife Service, Andrea Travnicek to be Assistant Secretary for Water and Science, Leslie Beyer to be Assistant Secretary for Land and Minerals Management, and William L. Doffermyre to be Solicitor were all advanced out of the Senate committees.