NJ and EGTRRA (not perfect together)

[Guest GG]

It's my understanding that NJ is NOT an EGTRRA conforming state, however the state tax code will recognize the new 401 (k) limits under EGTRRA. So far so good...

Now for the more difficult part of having a business in the Garden State (or any other EGTRRA non-conforming state), can we for example design or make an allocation to a Profit Sharing plan in excess of 15% of covered compensation? Are we dead in the water for permitting other EGTRRA provisions (e.g. enhanced rollovers, increased compensation and 415 limits, etc.) in a plan? Are we risking a plan disqualification at State level? I know at Federal level we're good, but what happens when Federal and State laws collide?

I haven't seen anything written about this subject and perhaps I can be lead to a good source of information. Does anyone have other thoughts about this mess?

Thanks for reading this message.

[Fredman]

My understanding is that nonconforming states cause headaches at the participant level and not so much at the plan level.

Here's a Q&A from the Technical Answer Group (www.tagdata.com) that might be helpful:

Question:

State tax law and EGTRRA - I have heard that some of the states do not recognize the changes made by EGTRRA. Is this true, and what impact does it have? Should I advise clients not to incorporate the EGTRRA changes unless and until their state complies with EGTRRA?

Answer:

Most of the states automatically comply with changes to the federal tax code. However, there are some that do not. These states are referred to as nonconforming states. When there is an amendment made to the Internal Revenue Code, the nonconforming states must amend their state tax codes if they want to adopt the same tax provisions as are included in the amendment of the federal code. This is an area of particular interest with regard to the EGTRRA changes. For example, the nonconforming states do not automatically recognize the increased contribution limits under Code Section 415, the increased deferral limits under 402(g), the availability of catch up contributions, or the expanded rollover rules. Participants in these states can make catch up contributions, but the amount of the catch up contribution would be included in income for purposes of applying the state income tax. The same would hold true for the other EGTRRA changes.

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...even if the states do not amend to raise the deferral limits (or other EGTRRA changes), the changes will still apply for purposes of the federal tax code. While the changes may not be as advantageous in states that elect not to comply with EGTRRA, the affect on federal taxes is still significant. I would not make the decision to adopt or not adopt the EGTRRA changes based on state tax law."

I've never seen a plan disqualified at the state level. I don't think this is possible. Good Luck.

[mbozek]

GG: NJ is a peculiar state in that it provides few deductions from gross income tax. NJ excludes employee 401(K) contributions but does not exclude 403(B), 125 or IRA deductions. Self employed persons are not allowed to deduct contributions to their own retirement plans. However line 24 of Schedule A to the NJ corp income tax form allows deductions for pension plan contributions to the extent deductions are allowed under the fed return. Whether NJ will restrict pension deductions to pre EGTRRA limits is the subject of the current budget proposals being considered to reduce the $5B deficit. Right now the Gov. wants to make corporations pay more income tax. However pension plans are not qualified under state law. The worst case would be if the state limits pension/ps deductions to the pre EGTRRA limits. According to the NJ 1040 income tax guide (p25) tax free rollovers from an IRA or Qualified plan are not taxed if the rollover is to another eligible plan permitted under Fed law. It is highly unlikely that NJ would not permit rollovers of transfers permitted under EGTRRA because it would be regarded as a income tax increase on individuals which the Governor has pledged not to request.