Employee Benefits Bulletin, June 2002
ALABAMA CONFORMS TO EGTRRA
NO STATE TAX ON CATCH-UP CONTRIBUTIONS
As discussed in previous editions 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"). Alabama was one of the 20 or so states having an income tax not consistent with the EGTRRA changes. Due to the inconsistency, Alabamians eligible for the new catch-up contribution would owe state tax on the same money that was tax-deferred on the federal level. However, technical corrections of EGTRRA that were passed by Congress in the Job Creation and Worker Assistance Act of 2002 ("JCWAA") allow Alabama tax law to conform with the federal on all employee benefits issues, including catch-up contributions.
The Alabama Department of Revenue issued a statement explaining the reversal of interpretation: "The catch-up contributions apply to individuals who are age 50 or over and participate in 401(k), SEP, SIMPLE, 403(b), and 457 plans as provided under new IRC Section 414(v), and for IRA participants as provided under IRC Section 219. Alabama law is not directly tied to Section 414(v), but the technical changes in the JCWAA amended IRS Section 402 to incorporate the catch-up provisions of IRS Section 414(v). Thus, since Alabama tax law is directly tied to IRS Sections 402 and 219, Alabama's tax treatment of the catch-up provisions will mirror federal tax treatment with the same effective date."
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