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January 07, 2002
New Pension Limits Threatened by State Laws
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ERISA Industry Committee (ERIC), an association of large employers that sponsor comprehensive pension and health care plans, is warning that many of the pension and benefit reforms enacted by the federal government in 2001 may be undermined because they don't jibe with tax codes in at least 10 states.

"Millions of working Americans concerned about their future after work cheered as Congress permitted them to more effectively save for their own retirement," said ERIC President Mark J. Ugoretz. "Now, after people have made long-term plans in reliance on federal law, non-conforming state tax code threaten to upset those arrangements."

The problem arises, according to ERIC, because the tax laws of several states do not automatically incorporate the new federal pension reforms, enacted last June as the Economic Growth and Tax Relief Reconciliation Act, or EGTRRA.

Without action to bring state tax codes into conformity with the U.S. Internal Revenue Code (IRC), individuals and employers will be confronted with tremendous uncertainty about to fully implement the new federal laws. ERIC was an early proponent of the reforms.

"The number of questions raised and the burdens placed on employees and employers as a result of state non-conformity are daunting," ERIC observes. "Determining where problems exist, crafting solutions to those problems, and implementing new rules on a state-by-state basis will be so costly as to prohibit many employers from offering their employees the enhanced retirement security opportunities to employees available under EGTRRA."

For example, if the non-conforming states take no action to conform to the IRC:

* contributions in excess of old IRC limits to 401(k) plans will be included in an individual's state taxable income;

* the popular "catch-up" contributions under EGTRRA, which allows workers over age 50 to save additional amounts for retirement - will be taxed as income at the state level;

* individual workers will have to track taxes paid on contributions over their entire career to avoid double taxation on retirement or when a distribution in made;

* newly allowed roll-overs from governmental retirement plans into private sector retirement plans could result in egregious tax liabilities for individual workers;

* plan sponsors - especially those operating in more than one state - may be unwilling to take on the increased administrative and record keeping burdens associated with nonconformity; and

* retirement plans could lose favorable tax treatment, exposing plan sponsors and participants to extraordinary penalties.

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