403(b) Deferral in New Jersey

Plan Sponsor adopting new 403(b) plan and has a New Jersey Employee.  The Employee has discovered that 403(b) deferrals are not pre-tax in New Jersey (Pre-Tax Federal but not NJ taxes).  What can be done for this employee?

OH, OH, OH!!!  NY 3329 (February of 2026!) is a new bill which would extend the state (New Jersey) income tax exclusion to employees of non-profits with 403(b) deferrals!  The Bill is in Committee in New Jersey.

"Specifically, it excludes elective contributions made by these employees to their retirement plans from New Jersey's gross income tax. This includes contributions to plans authorized under section 401(k) of the federal Internal Revenue Code for private sector workers, and now extends similar tax deferrals to employees of governments and non-profits who contribute to elective deferred compensation systems allowed under federal law, such as those established under section 403(b) for charitable, educational, and religious organizations," 

That legislation is proposed does not mean it will be enacted.

Before 1984, people complained about New Jersey law’s income tax treatment of § 403(b) participant contributions. Criticisms became more focused when New Jersey enacted an exclusion from income for § 401(k) deferrals, but not for § 403(b) or § 457(b). After 42 years’ asymmetry, one might wonder about the legislative prospects.

If the NJ-burdened employee prefers non-Roth elective deferrals and the charity is amenable to helping her, the charity might consider establishing a plan with a § 401(k) arrangement.

That plan might be available to an employee who is a resident of New Jersey.

Conversely, a § 403(b) plan might exclude an employee who is eligible for the employer’s plan that includes a § 401(k) arrangement.

An employee who is eligible to make a § 401(k) cash-or-deferred election under a plan of the employer may be excluded from § 403(b)(12)(A)(ii)’s universal-availability condition.

26 C.F.R. § 1.403(b)-5(b)(4)(ii)(B) https://www.ecfr.gov/current/title-26/part-1/section-1.403(b)-5#p-1.403(b)-5(b)(4)(ii)(B).

23 hours ago, Patricia Neal Jensen said:

Plan Sponsor adopting new 403(b) plan and has a New Jersey Employee.  The Employee has discovered that 403(b) deferrals are not pre-tax in New Jersey (Pre-Tax Federal but not NJ taxes).  What can be done for this employee?

The employee can still contribute to the 403(b) plan, they just don't get the immediate tax benefit.  For those of us in the business a long time, there was a time when 401(k) pre tax deferrals were not recognized for state tax purposes.  I live in CA and they still don't recognize HSA contributions for income tax purposes.

If an individual gets § 403(b) distributions while she remains subject to New Jersey’s income tax, there is some recovery for previously taxed amounts.

But if an individual becomes a domiciliary or resident of another State and subject to its income tax, the other State may tax § 403(b) distributions, and need not provide any relief regarding amounts previously taxed by sister States.

See 4 U.S.C. § 114 https://www.govinfo.gov/content/pkg/USCODE-2024-title4/pdf/USCODE-2024-title4-chap4-sec114.pdf.

New Jersey is not alone in setting up a “double-taxation” risk for someone who retires elsewhere.

A participant contribution—whether § 401(k), § 403(b), § 457(b), or something else—is not any exclusion from compensation for Pennsylvania’s income tax (and Philadelphia’s wage tax).