Alabama Portable Benefits Law and Tax Deductions for 2026

Vensure would like to remind employers that on April 10, 2025, Governor Kay Ivey signed Senate Bill (SB) 86, the “Portable Benefits Act,” into law, creating a framework for portable benefit accounts for independent contractors and allowing certain Alabama tax deductions for contributions to those accounts.

The law applies to hiring parties and independent contractors in Alabama. It became effective on December 31, 2025, and permits related deductions for tax years beginning after that date (i.e., tax year 2026 and forward).

What Employers Need to Do

• Evaluate whether the organization wants to offer portable benefit accounts and if it is appropriate.

• Revise independent contractor agreements before implementation if contributions will be funded through withholding from contractor compensation, because withholding is allowed only if it is expressly agreed to in writing by both parties, is clear and unambiguous, is prominently displayed in the contract or a separate notice, is voluntary, requires opt-in, and permits opt-out at any time.

• Coordinate with tax, legal, payroll, and procurement teams for 2026 and later tax years, because a hiring party may deduct 100% of its own contributions as a business expense on its Alabama income tax return, while a qualifying independent contractor may deduct both hiring-party contributions and the contractor’s own contributions, subject to the statute’s prohibition on deducting the same item more than once.

• Use a qualified portable benefit account provider if implementing a program, because the law contemplates administration by a bank, investment management firm, or a technology provider or program manager offering services through a bank or investment management firm.

Overview

• The Portable Benefits Act allows hiring parties to fund benefits for independent contractors through contractor-owned accounts administered by a qualifying provider.

• A portable benefit account is an account opened by an independent contractor to fund benefits such as health benefits, income replacement insurance, life insurance, or retirement benefits, and the law broadly allows contributions by any person or entity.

• From an operational perspective, the key issue is how contributions are made: hiring parties may contribute their own funds, but any withholding from contractor compensation is allowed only if the arrangement meets the law’s written-consent, disclosure, voluntariness, opt-in, and opt-out requirements.

• The law also includes a limited safe harbor providing that a hiring party’s contribution to a portable benefit account as compensation may not be treated by an Alabama court as evidence of an employment relationship, including for purposes of liability under the Alabama Workers’ Compensation Act.

• For tax years beginning after December 31, 2025, the law allows hiring parties to deduct 100% of their own contributions as a business expense and allows qualifying independent contractors to deduct both hiring-party contributions and their own contributions, while prohibiting double deductions.

Why This Matters

This law gives Alabama employers a new option to support independent contractors while preserving an argument that contributions alone should not indicate an employment relationship under Alabama law.

It also creates a potentially valuable Alabama tax benefit for both hiring parties and contractors, but only if contributions and any withholding arrangements are structured in accordance with the statute’s specific requirements.

Key Risks for Employers

• Misclassification overreach risk: Employers may overread the statute’s protection and assume it resolves broader worker-classification issues, even though the enrolled text more narrowly states that the contribution may not be construed by an Alabama court as an element of an employment relationship.

• Withholding compliance risk: Employers that fund contributions through deductions from contractor compensation may face contractual or compliance problems if the arrangement is not clearly documented in writing, prominently disclosed, voluntary, opt-in based, and freely terminable by the contractor.

• Tax documentation risk: Employers may create tax-reporting or deduction issues if contributions are not tracked clearly, especially because the statute allows deductions beginning with tax years after December 31, 2025, and expressly prohibits deducting the same item more than once.

Additional Information

Statutory Placement and Definitions

• The law defines a “hiring party” as a person or entity that hires or enters into a contract for the performance of work with an independent contractor.

• A “portable benefit account provider” includes a bank, an investment management firm, or a technology provider or program manager that offers services through a bank or investment management firm.

• For purposes of the act, a “bank” means a banking corporation or trust company entitled to operate within Alabama under Title 5 of the Code of Alabama.

Contributions and Contractor Elections

• The law allows any person or entity, including an internet or application-based entity, may contribute funds to one or more portable benefit accounts.

• Where contributions are made through withholding from compensation owed to an independent contractor, the law requires the withholding to be expressly agreed to in writing, clearly and prominently disclosed, voluntary, based on opt-in, and subject to opt-out at any time.

Tax Deductions

• For tax years beginning after December 31, 2025, a hiring party may deduct 100% of the amount contributed as a business expense on its Alabama income tax return to compute Alabama taxable income.

• A qualifying independent contractor may deduct, as an adjustment to income on the Alabama individual income tax return, 100% of the amount contributed by the hiring party during the applicable tax year, as well as any contributions the contractor made during that tax year.

• The statute further provides that nothing in the section allows any item to be deducted more than once.

Source Reference

• Alabama SB 86 – Labor and employment, independent contractors, establishment of portable benefits accounts
• Alabama Legislature Search – SB 86 – Labor and employment, independent contractors, establishment of portable benefits accounts

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