Pennsylvania changes state tax law for dependent care assistance benefits

The Commonwealth of Pennsylvania recently enacted House Bill 1300, which included a change to the state’s tax treatment for dependent care assistance benefits, including dependent care flexible spending accounts (DCFSAs). Pennsylvania now aligns with federal tax law and excludes employer-provided dependent care assistance benefits from state taxable income. This change is retroactive to January 1, 2023.

We believe many FSA vendors communicated this to their clients. It is also entirely possible that payroll vendors notified their clients of this change and addressed it via software updates. This issue may still have flown under the radar for a number of employers, and/or the notification came after the employers issued their 2023 Forms W-2. This Alert is relevant for employers providing DCFSA benefits to employees who are Pennsylvania residents. Our Alert summarizes the changes to Pennsylvania’s tax law, how it affects employers, and what steps employers should take for 2023 and later years if they have not done so already.