Alabama Establishes Portable Benefit Accounts for Independent Contractors

By Denis Del Bene, JD, LL.M., Checkpoint

Alabama has enacted legislation providing for the establishment of portable benefit accounts for independent contractors and, for tax years beginning after December 31, 2025, for the deduction of contributions to the accounts for Alabama income tax purposes. (L. 2025, S86 (Act 119), effective 12/31/2025.)

A “portable benefit account” is an account owned by an independent contractor for the purpose of funding the purchase of one or more benefit plans, including plans that provide health benefits, income replacement insurance, life insurance, or retirement benefits and is administered by a portable benefit account provider. 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.

Any person or entity, including an internet or application based entity, can contribute funds to one or more portable benefit accounts.

Contributions. A contribution to a portable benefit account can be made using the funds of the hiring party or a percentage of funds withheld from the compensation owed to an independent contractor if:

the withholding of compensation is expressly agreed to in writing by both parties;
the written agreement is clear, unambiguous, and prominently displayed in a services agreement or other contract between the independent contractor and the hiring party or a separate notice;
the withholding of compensation is voluntary and requires an independent contractor to opt in; and
the independent contractor may choose to opt out of the agreement at any time.

Where a hiring party contributes to a portable benefit account as a form of compensation, the contribution cannot be construed by an Alabama court as any element of an employment relationship.

Deductions. For tax years beginning after December 31, 2025:

A hiring party that contributes its own funds to a portable benefit account as a form of compensation may deduct as a business expense on its Alabama income tax return to compute Alabama taxable income an amount equal to 100% of the amount contributed during the tax year.
A qualifying independent contractor may deduct, as an adjustment to income on its Alabama individual income tax return, an amount equal to 100% of the amount contributed by a hiring party as a form of compensation to a portable benefit account during the tax year and any contributions that the independent contractor made to a portable benefit account during the tax year.