By:  Christopher A. Jones, Edward I. Leeds, and Rachel A. Loscheider

The Commonwealth of Pennsylvania enacted 2023 Act 34, Section 202.3 (HB 1300), which brings its tax treatment of dependent care assistance provided by an employer in line with the federal income tax exclusion under section 129 of the Internal Revenue Code (IRC). Importantly, “dependent care assistance” includes employee contributions to dependent care assistance programs or, as they are also commonly known, dependent care flexible spending accounts (FSAs). This change means that up to $5,000 per year in employer-provided dependent care assistance benefits (up to $2,500 if married and filing separately) may be excluded from Pennsylvania personal income tax by employees and excluded from PA personal income tax withholding by employers. This resolves a long-standing disconnect between the federal and Commonwealth tax rules with respect to dependent care assistance. The Act is effective retroactively to January 1, 2023.

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