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Pennsylvania Modifies Tax Treatment of Dependent Care Assistance Plan Contributions

04/04/24

Author: ADP Admin/Tuesday, April 2, 2024/Categories: Compliance Corner , State Compliance Update, Pennsylvania

Pennsylvania has modified its tax code to treat Dependent Care Assistance Plan (DCAP) contribution amounts up to $5,000 as being excluded from Pennsylvania state income tax and Pennsylvania local Earned Income Taxes (EIT)

The details:

With the enactment of Pennsylvania House Bill 1300 (HB 1300), the Tax Reform Act of 1971 was amended to stipulate contributions to an Internal Revenue Code Section 129 DCAP will no longer be subject to the state income tax.  Previously, DCAP contributions were only exempt from federal taxation.

Note: Since local EITs under Pennsylvania Act 32 of 2008 use the same taxable wages as state income tax, these contributions are no longer subject to local EIT as well.  Philadelphia local income tax is not under PA Act 32 as is therefore not impacted.

HB 1300 retroactively modified the state income tax treatment of DCAP contributions back to Jan.  1, 2023.   In February, Pennsylvania released guidance to both employers and employees (see below) in the state the process that may be followed to claim a state income deduction for DCAP contributions made during the 2023 tax year.

Act 34 of 2023 - Dependent Care Plan (Section 129) - Employer Info (custhelp.com)

Act 34 of 2023 - Dependent Care Plan (Section 129) - Employee Info (custhelp.com)

Recently, Pennsylvania released further guidance stating in the link below:

“Stop withholding for tax year 2024 on dependent care benefits (up to $5,000).”

Dependent Care Assistance (pa.gov)

Next steps for 2024:

·       The ADP TotalSource, Inc. Dependent Care Flexible Spending Account is intended to qualify as a DCAP under Section 129 of the Internal Revenue Code.  Contributions made to the DCAP on or after January 1, 2024 will be treated as pre-tax in relation to Pennsylvania state income taxes.

·       ADP modified its payroll systems for payrolls processing on or after March 15, 2024, to treat contributions to a DCAP made under a qualified Internal Revenue Code Section 125 cafeteria plan as pre-tax in relation to Pennsylvania state and local earned income taxes, except Philadelphia.

·       For employees with DCAP contributions made on or after Jan. 1, 2024, and prior to when the ADP systems were updated, the taxable wages have been adjusted retroactively to reflect the Pennsylvania pre-tax treatment.  These adjustments will be reflected in your Wage & Tax Registers, quarterly returns, and W-2s for first quarter 2024 and beyond.  Employees will reconcile their state and local taxes withheld when filing their personal income tax returns.

Next steps for 2023:

ADP is currently analyzing options for handling updates for 2023.  We will communicate again soon with more information and instructions.

Have questions?

Please contact your ADP Service Representative with any questions. 

 

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