Fourteen states have failed to update income tax laws to conform with changes in federal law that allow increased participant contributions to 401(k) plans, creating new headaches for defined contribution plan administrators.

Some consultants are advising multi-state employers to delay plan amendments until the states comply with the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which increased the maximum yearly 401(k) contribution to $11,000 and lets participants over 50 make an additional $1,000 "catch-up" contribution.

"If there’s a conflict between the feds and the state, most employers are likely to sit on their hands," comments Dennis Blair, senior vice president at Aon Consulting in Newburyport, Mass. Blair predicts the states will update their tax laws to comply, but says employers will be reluctant to take on administrative burdens beforehand.

The Profitsharing/401(k) Council of America fears that California, the largest of the nonconforming states, will resist the change to its tax code due to an expected $12.4 billion budget deficit, says Ed Ferrigno, vice president of Washington Affairs for PSCA. "The problem is many of the states are in deficit and they have balanced budget amendments," he notes.

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