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Employee Benefits Bulletin, May 2002

EGTRRA NONCONFORMING STATES AN UPDATE

As described in the January/February 2002 issue of the Employee Benefits Bulletin, many state income taxes do not reflect the changes made in the federal tax structure by the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). The most common employee benefit discrepancies involve the permissible salary deferral increase in 401(k), 403(b), and 457 plans (from $10,500 to $11,000 in 2002), the treatment of catch-up contributions made by participants age 50 and over, the increase in the annual limit on compensation taken into account in a qualified retirement plan (from $170,000 to $200,000), and the new rollover rules.

California (May 8) and Kentucky (April 24) are the latest states to conform their tax codes to EGTRRA. Only nine states remain that have not adopted EGTRRA conforming legislation (Alabama, Arizona, Georgia, Hawaii, Wisconsin, Arkansas, Massachusetts, North Carolina and Pennsylvania). However, this list is still dwindling: Georgia's legislature has passed a bill that is awaiting the governor's signature, and the Hawaiian Senate and House have both passed legislation that is in conference.

The Alabama Department of Revenue interprets the Alabama Code to conform with EGTRRA on all employee benefits issues except that of the new catch-up contributions. This discrepancy between federal and state law will cause 50 year old participants eligible for the extra $1000 of tax deferred contributions on the federal level to owe state taxes on the same money. The unparallel treatment will cause confusion for participants and record-keeping headaches for Alabama employers who choose to amend their plans to allow the catch-up contributions.

The Alabama Legislature adjourned its 2002 Regular Session on April 17th without passing legislation that would have brought the state into compliance. The legislature is not set to reconvene until next year. The governor could call a special legislative session to address this issue, but no such plans are in the works at this time. We will keep you informed of any developments.

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