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

Answer ID 4203   |    Published 02/01/2024 08:03 PM   |    Updated 03/06/2024 05:07 PM

Is employer provided dependent care assistance under an IRC § 129 Dependent Care Assistance Program subject to PA Personal income Tax?

 

Under Act 34 of 2023 (HB 1300), amounts paid or incurred by an employer for dependent care assistance provided to an employee under an IRC § 129 dependent care assistance program is not included in the employee’s taxable compensation for Pennsylvania Personal Income Tax purposes. This PA law change, which went into effect on Dec. 14, 2023, pertains to dependent care assistance programs under Title 26 of the Internal Revenue Code (26 U.S.C. § 129).   The types of dependent care assistance covered by the new law include:

(a) the fair market value of benefits provided in kind by the employer, (b) an amount paid directly to a daycare facility by the employer or reimbursed to the employee to subsidize the benefit, or (c) benefits from the pre-tax contributions made by the employee under a section 125 dependent care flexible spending account.

Due to the timing of this change, employers have presumably been withholding tax on this type of assistance throughout the 2023 tax year.

This could create an issue when an employee who has received this benefit from an employer files their PA Personal Income Tax Return (PA-40). Here are some steps to address this issue if you are affected:

• If you have already filed your W-2s with the Department of Revenue, file a corrected W-2 with the dependent care benefits (up to $5,000) excluded. Provide an updated W-2 to the employee to alert them of the change.

• If you have not filed W-2s with the Department of Revenue, you can file updated W-2s in which the dependent care benefits reported in box 10 are not included in box 16, State Wages. If you make this adjustment, it should not exceed $5,000 for tax year 2023.

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