New Jersey is Bizzaro World For Retirement Plans

[austin3515]

• New Jersey does not allow you to exclude from wages amounts you contribute to deferred compensation and retirement plans, other than 401(k) Plans. Specific plans that New Jersey does not allow taxpayers to exclude contributions to include, but are not limited to, plans under I.R.C. § 403(b), I.R.C. § 457, 409A, I.R.C. § 414(h), SEP, Federal Thrift Savings Funds, or Individual Retirement Accounts. Employer contributions to these plans receive tax-deferred treatment. In addition, both employee and employer contributions to SIMPLE IRAs, SEP, and SARSEP plans are included in taxable wages (neither receive tax-deferred treatment).

https://www.nj.gov/treasury/taxation/njit5.shtml

I came to learn of this through work on 457b plans.  I had no idea how extensive their bizzarness was, including employer contributions to SIMPLE IRA's and SEPs.  I am posting here because they do not even allow deductions for 403(b) Plans.  This is really insane.  Are people aware of this??

[Paul I]

When it comes to state taxation of contributions, Pennsylvania is like New Jersey but PA also taxes 401(k) deferrals.  Tennessee used to be like PA but made a change in 2021.  Here is a relatively up to date chart that summarizes all of the states (hint: most follow Federal rules or don't tax deferred income).

https://www.ici.org/system/files/2022-12/state_tax_2022_survey4_red.pdf

To complicate matters even further, there are many local taxing authorities that also have rules that include deferred contributions.

The flip side of the coin is which states tax distributions from retirement plans.  Many do at some level of taxation with rules that range from taxing all distributions to thresholds when taxation starts and graduated schedules.

One thing that most retirees who worked in PA or NJ and then want to live in another state that taxes distributions.  Effectively, they will be double taxed at the state level - once when making the contributions into the plan and again when taking the distributions.

It is very rare for a plan to get into the details of state and local taxation from the perspective that it is not their responsibility or that they do not want to be deemed to have provided tax advice.

[Peter Gulia]

An asymmetry in New Jersey’s income tax treatment of § 401(k) and other kinds of deferrals has persisted since 1984.

https://benefitslink.com/boards/topic/80992-403b-deferral-in-new-jersey/#comment-355909

Many people are aware of New Jersey’s law.

Past efforts to persuade the legislature to change the law have failed.

[austin3515]

"Asymmetry" is much kinder than Bazaaro 🤣  Truthfully the word I wanted to use was probably not appropriate for a public forum!

[Peter Gulia]

It is sad that New Jersey’s legislature in 1984 changed the law to provide an exclusion for elective deferrals made under a profit-seeking employer’s plan but not for those made by employees of a charity, a public school, or another governmental employer.

[rocknrolls2]

To further stir the pot on the inanity of NJ's taxation (I am a resident), NJ also does not allow an income tax exclusion for pre-tax contributions to cafeteria plans, flexible spending accounts and 132(f) transit accounts. Even though it has an exclusion for contributions to a cafeteria plan, most employers' concept of a cafeteria plan do not satisfy the conditions for the income exclusion section.

[Artie M]

New Jersey is very odd.  Back in 2021 one of my clients asked us assist one of its employees (someone pretty high up on the food chain) who had deferred over 90% of their income into the company's nonqualified deferred comp plans.  This employee was a NJ resident.  We are located in the South and normally do not provide any services with regard to NJ so I contacted a friend, tax partner in D.C who is barred in NJ, to assist.  The client had treated the deferred comp as required under the IRC, which, we found did not align with the NJ rules (we didn't advise on the original set up).  The employee had paid the increased NJ tax based on 2019 601B and was assessed a tax, penalties and interest of over $40K and asked the client if they could provide assistance with at least a possible waiver of the penalty and interest.  Though we formulated arguments to assist the employee, we were not optimistic based on our reading of the NJ law.  We in fact were researching the statute of limitations as to how far back could they go with this.   After "chasing this rabbit" as the client phrased it, and working with the programmers to change the payroll set up, NJ ended up conceding that the deferrals weren't subject to NJ state tax and refunded the client all of the $40K plus interest.  None of us understanding the NJ reversal but of course did not argue.  

[Paul I]

... and the moral of @Artie M's story is you must "respect" people in South Jersey