Employer Alert – New Pennsylvania Law for Dependent Care FSA Deductions

Employer provided dependent care assistance under an Internal Revenue Code section 129 Dependent Care Assistance Program (DCAP) has historically been subject to Pennsylvania (PA) personal income tax. PA income tax law has previously provided that only health care related contributions (health, dental vision) to cafeteria plans are excludable from PA tax (i.e., dependent care and adoption assistance has historically been treated as taxable). Under PA Act 34, effective on December 14, 2023, amounts paid or incurred by an employer for DCAP provided to an employee are now excludable from the employee’s PA personal income tax obligation.

Due to the timing of this PA law change, employers have presumably been withholding tax on this type of assistance throughout the 2023 tax year. This could create an issue when a PA employee who has received a DCAP benefit from an employer files their 2023 PA Personal Income Tax Return (PA-40). In this case, employees will have received a W-2 that does not account for this update to PA law for the 2023 year pertaining to DCAPs. Therefore, we understand affected employees can file their 2023 PA-40 with the corrected W-2 amounts and receive a refund for the over-withholding. In that case, they are instructed to:

1. Decrease the box 16 wages indicated on their 2023 W-2 by the amount of their 2023 dependent care benefits (up to $5,000), and use that amount for line 1a of their PA-40, and

2. Include their 2023 W-2 along with a written statement from their employer to verify why the amounts on the W-2 do not match the amount reported on line 1a.​
   

We have created a template written statement that an employer may consider providing to their affected PA employees to meet this requirement. Note too that payroll should also stop PA withholding for tax year 2024 on DCAP benefits. See this PA Department of Revenue page for more information.

As always, employers are advised to confer with their qualified tax advisers on all tax related withholding issues. Please contact your Conner Strong & Buckelew account representative toll-free at 1-877-861-3220 with any questions. For a complete list of Legislative Updates issued by Conner Strong & Buckelew, visit our online Resource Center.