What is the New Pennsylvania Tax Break for Small Businesses?
In July 2024, Pennsylvania enacted a new tax credit as part of Act 56 of 2024, offering an incentive for employers that make matching contributions to their employees’ 529 college savings accounts.
This initiative aims to encourage employers to help their employees save for education.
Eligibility and Benefits of Pennsylvania’s Small Business 529 Contribution Tax Credit
Pennsylvania employers, including small businesses, can now receive a state tax credit for matching contributions made to their employees’ 529 or PA ABLE accounts. The credit can be applied against corporate net income tax and, for pass-through entities, personal income tax, such as for:
- Partnerships
- S-corporations
- limited liability companies (LLCs)
The tax break is designed to encourage more employers to participate in supporting their employees’ education savings efforts.
How Much Can Pennsylvania Employers Contribute to 529 Plans for Tax Credits?
Employers can receive a 25 percent tax credit on matching contributions of up to $500 per employee per year. The employer’s match cannot exceed what the employee contributes during the same year.
If an employer makes a $500 matching contribution to an employee’s 529 or PA ABLE account, it can receive a $125 tax credit.
This incentive encourages employers to support their employees’ education savings while also benefiting from a reduction in their tax liabilities.
By contributing to 529 plans, employers can help their employees build up savings for their children’s higher education costs.
Impact of Employer 529 Contributions on Pennsylvania Employees
Employees can benefit from their employers’ contributions to 529 college savings accounts. These contributions help build savings that grow tax-deferred and can be withdrawn tax-free for qualified education expenses.
This support can alleviate some of the financial burdens associated with higher education, making it more accessible for families.
Requirements for Pennsylvania’s 529 Plan Tax Credit Program
To qualify for the credit, the employer must offer the matching contribution to all employees, and contributions must be made to a 529 or PA ABLE account owned by a Pennsylvania resident employee.
Effective Date of Pennsylvania’s Small Business 529 Contribution Tax Break
The credit is available for matching contributions made starting in the 2025 tax year and is scheduled to expire after 2029 unless renewed. Employers apply through myPATH by January 31 for credits earned in the prior year. For details, see the Pennsylvania Department of Revenue’s program guidelines.
This initiative is part of Pennsylvania’s broader efforts to support education and make higher education more accessible for families across the state.
Importance of Pennsylvania’s 529 Tax Credit for Small Businesses and Families
By incentivizing small businesses to contribute to 529 plans, Pennsylvania aims to alleviate some of the financial burdens of higher education for its residents.
This tax credit may reduce employers’ state tax liabilities while also supporting employees in their efforts to save for their children’s future educational needs. It represents a significant step towards making higher education more attainable for families throughout the state.
What Did State Officials Say About HB 1745?
On June 10, 2024, Treasurer Stacy Garrity commended the Senate Finance Committee for unanimously approving legislation aimed at further enhancing the PA 529 College and Career Savings Program and PA ABLE Savings Program. HB 1745, sponsored by Rep. Paul Friel (D-26), proposed tax credits for employers who provide matching contributions to their employees’ PA 529 and PA ABLE accounts. The credit was later enacted as part of Act 56 of 2024.
The bill was also amended to allow excess funds in a PA 529 plan to be rolled over to a Roth IRA without any state taxes. This amendment, originally introduced in House Bill 2119 by Rep. Greg Scott (D-54) and Rep. Steve Samuelson (D-135), adds significant flexibility and benefits for Pennsylvania families.
About the Authors
Alexander Langan, J.D., is the Chief Investment Officer at Langan Financial Group. In this role, he manages investment portfolios, acts as a fiduciary for group retirement plans and consults with clients regarding their financial goals, risk tolerance and asset allocation.
With a focus on ERISA Law, Alex graduated cum laude from Widener Commonwealth Law School. He then clerked for the Supreme Court of Pennsylvania and worked in the Legal Office of the Pennsylvania Office of the Budget, where he assisted in directing and advising policy determinations on state and federal tax, administrative law, and contractual issues.
Alex is also passionate about giving back to the community and has helped establish The Foundation of Enhancing Communities’ Emerging Philanthropist Program, volunteers at his church, and serves as a board member of Samara: The Center of Individual & Family Growth. Outside of work and volunteering, Alex enjoys his time with his wife Sarah and their three children, Rory, Patrick, and Ava.
About Langan Financial Group
For everything you’ve built.
Your savings. Your business. Your family’s future. Each deserves thoughtful planning that starts with what matters to you.
Langan Financial Group provides financial planning and investment management for individuals, families, and business owners. With offices in Camp Hill and York, Pennsylvania, we serve clients throughout Central Pennsylvania.
We help you work through questions about retirement income, investment decisions, Social Security, and how taxes may affect your financial plan. Our approach starts with understanding your goals, your financial picture, and your comfort with investment risk. From there, we help you evaluate your options and develop a plan that can evolve as your life changes.
We also help businesses and organizations evaluate workplace retirement plans and understand their responsibilities as plan sponsors.
Disclosures
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
