California Moves Closer to EGTRRA Conformity

April 18, 2002 ( - To resolve a disconnect between state pension law and the changes to retirement savings legislation brought about by EGTRRA, California lawmakers have sent a bill regulating public sector pensions to Governor Gray Davis' desk, and are pushing two others through the legislative process, BNA reports.

The other two pieces of legislation deal with private-section pensions and retirement plans as well as other federal tax law alterations made between 1998 and 2000 that California hasn’t yet confirmed to.

The bill on the Governor’s desk allows public employees in 457 plans to roll over eligible distributions to or from 457 plans, to 403(b) programs, or to an IRA.
The other two bills increase the permissible contributions to 401(k) plans, Roth and traditional IRAs, and defined benefit plans. Like EGTRRA, they allow shorter vesting periods beginning this year. They also:

  • allow investors older than 50 to save more than before,
  • increase the contribution cap for education IRAs, and
  • increase the portability of retirement plan balances when employees change jobs

To pay for the EGTRRA changes, lawmakers struck two business deductions and added a requirement about confirming Subchapter S or Subchapter C corporation elections made on federal tax returns to those on state tax returns.

The California bills also would allow:

  • tax-free distributions from qualified state tuition programs – so-called 529 plans – rather than taxing them at the rate of the beneficiary,
  • prepaid tuition plans of eligible institutions to be classified as qualified tuition plans, and
  • rollovers between such plans

Lawmakers are pushing to enact conformity legislation quickly to minimize the amount of time during which state and federal laws differ, and minimize the confusion and potential consequences for taxpayers that want to take advantage of the new federal pension investment levels.