TO: CSI Member Schools in Pennsylvania
FROM: Brian C. Meekhof, Benefits Administrator
Pennsylvania State Tax Law Now Allows Pretax Contributions for Sec. 125 Health Plans like the Rainbow Plan
Recent state tax legislation makes the Rainbow Plan a more valuable benefit for CSI schools and staff in Pennsylvania.
Tax legislation signed into law on May 7, 1997, contains provisions that now exclude employee contributions to premium conversion health plans and health care flexible spending accounts (FSAs) from state income tax. The new law, however, continues to be narrower than federal law and does not extend this tax preference to dependent care assistance. As a result, employee contributions to a dependent care FSA will still be subject to state income tax.
The law was effective retroactively to January 1, 1997. In a policy statement explaining the Pennsylvania Personal Income Tax treatment of Sec. 125 plans, the State offers employers this guidance for the preparation of 1997 wage and tax statements:
- Complete W-2 tax withholding consistent with the change in the law.
- Begin withholding consistent with the law as of the first payroll period ending in 1998.
- Reduce withholding for the fourth quarter payroll period to make up for overcollections in the first three quarters of 1997 that resulted from the retroactive effect.
NOTE: As an alternative, employers may repay overcollections to employees, but only if:
a. the tax has not yet been deposited and
b. the employer obtains a written receipt from the employees showing the date and amount of the repayment.