Independent contractors “got a brand new (benefits) bag” 

In 1965, the late R&B great James Brown won his first Grammy Award with the classic song, Papa’s Got a Brand New Bag. Sixty years later, a small but growing number of independent contractors and gig workers can sing a similar refrain. Their “brand new bag” is a Portable Benefits Account, enacted in two states this year and pending in a few others.  

The employee vs. independent contractor debate is not new, with no shortage of state and federal guidance on misclassification. Traditionally, a key differentiator has been benefits. Employees receive them; independent contractors don’t. State legislators are looking for ways to bridge this gap, and some have set their sights on PBAs.  

The seeds of this concept can be traced back to an article and report — both published in February 2023 — by the National Conference of State Legislatures. PBAs resemble health savings accounts, but without the need for a high-deductible health plan. Both hiring parties and individuals can contribute on a tax-free basis for state tax purposes. Individuals can withhold their contributions from pay and may opt out at any time. Individuals own the accounts, administered by a bank or similar party. Distributions are typically limited to health, disability, life insurance, and related benefit premiums as well as retirement benefit contributions. Two states (Nevada and Virginia) would include out-of-pocket medical expenses; Virginia would also include coverage for family members. A key legislative concern, voiced in a Virginia bill analysis, is estimating the potential tax revenue loss. In other words, how big is the gig economy in the state? 

A Congressional bill would ensure that provision of portable benefits is not relevant in the employee vs. independent contractor determination. The NCSL report highlighted this specific issue, and many of the bills confirm that a PBA is not relevant for state law purposes, like workers’ compensation. However, federal laws like the Fair Labor Standards Act are beyond states’ authority. Federal tax treatment is another issue. At least two federal tax questions would need an answer:  

1. Are contributions made by workers, hiring parties or any other source taxable or deductible? 
2. Can hiring parties deduct their contributions as ordinary and necessary expenses? 

So far, 11 states have looked into creating these accounts in 2025. Their status mirrors four of the ‘60s dances mentioned in Mr. Brown’s tune: 

1. The Fly. Tennessee’s was the first out of the gate, enacting a portable benefits law with immediate effect on April 3. Alabama’s law (effective Dec. 31) arrived a week later. Individuals have a state tax deduction for all contributions, and hiring parties have a state business expense tax deduction for their contributions. 
2. The Twist (pending bills). Florida (with House and Senate bills) and Nevada — like Tennessee — do not have a personal income tax, which makes the legislative analysis simpler. A Massachusetts bill would limit the account eligibility to app-based delivery drivers. New Jersey’s bill, introduced over a year ago, passed out of committee in January. 
3. The Mashed Potato. Bills in Hawaii and West Virginia (with House and Senate versions) failed to gain momentum. Virginia also had mirror House and Senate bills, each of which failed to progress.  
4. The Boomerang. Arkansas and Rhode Island deferred their bills, recommending further study. 

To quote Mr. Brown, once known as the hardest working man in show business, this “new breed” of accounts may prove to be “outta sight!”