Date:
January 10, 2002
Dear CSU Employee
RE: Update:
State and Federal Tax Law and Changes Affecting 401(k), 403(b) and 457 plans
You recently received information on the Economic Growth and
Tax Relief Reconciliation Act 0f 2001 (EGTRRA), which significantly revised
federal laws relating to retirement benefit programs.
This letter is to update you on
recent issues related to EGTRRA and California State law. It has been
established California tradition that State law is amended to conform to federal
law when retirement legislation is enacted so that California and federal rules
for retirement plans will not conflict.
However, due to the state's current budget situation, conforming state
legislation is not a given. The
Assembly and Senate Committees on Revenue and Taxation in the California
Legislature have publicly stated that while they understand that full state
conformity to the federal law is highly desirable, preliminary estimates
suggest that full conformity will result in a significant loss of state tax
revenue, so they anticipate there may be various attempts to conform partially
rather than fully with EGTRRA provisions.
State conforming legislation is
critical to enable our employees to enjoy the full scope of the new federal
retirement savings benefits. Tax laws of most states automatically
conform to changes in federal retirement tax law in calculating state tax
liability; unfortunately, in a minority of states, including California, the
state tax codes do not automatically conform.
Consequently, the higher federal deferrals
introduced through EGTRRA cannot be incorporated into the 403(b), 401(k) and
457 plans until California amends its tax code.
The California State University, the Public Employees’
Retirement System (PERS) and the Department of Administration (DPA), the
administrator of the Savings Plus 401(k) and 457 Plans, all acknowledge the
need for conforming legislation. In
fact, Assembly Bill (AB) 1743 was recently introduced and other bills are under
development. However, since we cannot
predict the ultimate outcome of state legislation, the following information is
provided for guidance:
► The 2001 maximum annual contribution
limits must be followed in 2002 because the California state law currently does
not conform to the new federal law. For most employees conforming legislation may not be an issue
because most currently do not contribute the maximums allowed. Attachment A provides a list of the elective
deferral limits available for 2002 at this time:
ü If employees contribute to CSU’s 403(b) Plan only, the annual maximum contribution is the lesser of $10,500 or 25% of annual compensation.
ü If employees contribute to the Savings Plus 401(k) Plan only, the annual maximum contribution is the lesser of $10,500 or 25% of annual compensation.
ü If employees contribute to the Savings Plus 457 Plan only, the annual maximum contribution is the lesser of $8,500 or 33 1/3 percent of annual compensation.
ü If employees contribute to both the
403(b) or 401(k) and the 457 plan in the same tax year, the maximum annual
contribution is the lesser of $8,500 annually or 33 1/3 percent of annual
compensation.
► Employees who participate in the 403(b),
401(k) or 457 plans should use the 2001 deferral maximums as a guide and hold
off increasing deferrals to the new federal maximums until further notice.
► If
legislation passes to conform California state tax law to the new federal
limits, employees will have an opportunity to change their 403(b), 401(k) and
457 elective deferrals at that time.
Employees participating in a 403(b) or 401(k) plan may also be able to
enroll in the 457 plan at that time and elect monthly contributions to meet
annual goals.
► Employees who already submitted paperwork to
increase their elective deferrals (to meet the new federal maximums) are
encouraged to reevaluate their situation in a few months if the state tax
conformity issue is not favorably resolved.
If California amends its
law to conform to the higher federal limits, employees will have an opportunity
to increase their elective deferrals at that time.
► Savings Plus Plan (SSP) participants will
receive an update on the federal and state tax situation in the fourth quarter
“Savings Plus NewsLine” newsletter issued later this month.
► Attachment
B provides a summary of the basic provisions of EGTRRA related to retirement
plans. These
limits are not available to employees until the nonconforming state law issue
is resolved.
As always, please contact your tax advisor or financial
planner for specific assistance in understanding the impact of federal and
state taxes on your individual situation.
We will keep you updated as meaningful information becomes
available.
If you would like additional information
about the State’s 401(k) or 457 plans, please contact the Savings Plus program
at (866) 566-4777. You may also obtain
information via the Department of Personnel Administrator’s web page at http://www.dpa.ca.gov. For information on the CSU 403(b) plan,
please contact (campus benefits representative) at extension 3771.
Sincerely,
Angelica Perez
Acting Benefits Manager
Attachments