State income taxes on retirement plan participants due to amending the

[Dave Baker]

Has anybody focused on states that have income tax codes that are not automatically updated for changes in the federal income tax code -- specifically, what steps a retirement plan sponsor might need to take if the plan uses the higher EGTRRA contribution limits but thereby causes some participants to have taxable income?

An article with details is here:

http://www.benefitslink.com/articles/egtrrastate.shtml

I'm particularly interested to know whether anybody has seen a state income tax authority threaten a plan with "disqualification" for state income tax purposes due to a mismatch between the plan's current operation or terms and the terms of the federal income tax code as of the earlier snapshot date used by the state for incorporating federal income tax rules. Fidelity raised this possibility in a report I saw. It would seem to be a draconian penalty but in theory the argument seems to hold up.

[Guest Nevin]

an interesting quandry. I remember this issue years ago when TRA86 and its treatment of allowing pre-tax contributions to be taken pre-social security withholding created similar conflicts. At the time, I recall Pennsylvania being a troublesome state on the matter - but have seen/heard nothing on it since.

[Guest DLombardi]

The December 5th issue of the Orange County Register includes an article on this issue as it affects Californians. The article says California Assemblyman John Campbell plans to introduce a bill today to force California to update their tax law to mirror the federal law changes under EGTRRA; however, the bill is expected to face a tough challenge because the tax-relief provisions would mean an approximately $100 million loss to the state's budget.

An online version of the article is at http://www.ocregister.com/sitearchives/200...01205cci1.shtml .

[Erik Read]

I had a discussion this weekend with a friend, and his office has been tossing the thought around for a few weeks now. The issue specific to California, is that we can't think of a case where the State imposed a penalty for over-funding. So, a client could take advantage of the new limits at the Federal level, and just not get the full deduction on the State Level -

Can anyone shoot some holes in that? I know each state is different. This is for California.

Thanks all.