It's Time for All Contributions to Retirement Plans to Be Treated Equally in New Jersey

By By Chris Schiffer, CPA, AEPG Wealth Strategies – February 12, 2019
The views expressed in this article are those of the author and not necessarily those of the NJCPA.

Pending legislation in New Jersey could level the playing field on retirement contributions. Unlike the Federal Government and most other States, New Jersey does not allow participants to make pre-tax contributions to 403(b) and 457 plans as well as Health Savings Accounts (HSA). (401(k) contributions are currently allowed on a pre-tax basis).  New proposed legislation would level the playing field for all retirement plans, correcting a disparity that impacts mostly teachers and not-for-profit employees.

Federal Treatment of Retirement Plan Contributions

Contributions to traditional 401(k) 403(b) and 457 plans are made on a pre-tax basis up to the annual contribution limits.  In 2019, the contribution limit is $19,000 with an additional $6,000 catch up for participants age 50 and over). If your employer matches your contributions, the matching amounts are also made on a pre-tax basis and are subject to applicable taxes when you withdraw from the plan.

Health Savings Account contributions are treated the same as retirement plan contributions:  pre-tax contributions up to the annual contribution limit of $3,500 for singles and $7,000 for families.

State Treatment of Retirement Plan Contributions

State tax rules don’t always follow federal guidelines, creating disparities.

Only seven states have no personal income tax: Wyoming, Washington, Texas, South Dakota, Nevada, Florida, Alaska. In these states, deductibility of retirement plan contributions does not apply.

For those states with income tax, the vast majority do not require 401(k) contributions to be included in state wages (e.g., pre-tax contributions)!  There are some notable exceptions.

Pennsylvania does not allow pre-tax contributions to any retirement plan. 

In New Jersey, oddly enough, the type of plan determines the “pre-taxability,” as follows:

  • 401(k) Plans. 401(k) plans are the most common retirement savings vehicles used by for-profit public and private companies. Since Jan. 1, 1984, employee contributions to 401(k) plans are excluded from taxable wages when earned.
  • 403(b) Plans. A 403(b) is primarily used by nonprofit organizations, religious groups, school districts and governmental organizations. The law grants these organizations exemption from certain administrative processes that apply to 401(k) plans. Participants in a 403(b) plan will have plan contributions included in New Jersey income. At retirement, taxes are assessed on amounts received in excess of those contributions (e.g., interest, dividends, investment earnings). In other words, teachers and other nonprofit employees in New Jersey pay taxes on their 403(b) contributions, while for-profit employees are not subject to New Jersey tax on contributions to equivalent 401(k) programs.
  • 457 Plans. Public schools, colleges, universities, charities, state governments, local governments and other tax-exempt entities may offer 457 plans. Participants in an eligible deferred compensation plan of a state or local government or tax-exempt organization (Section 457), will have contributions included in New Jersey income. At retirement, taxes are assessed on amounts received in excess of those contributions (e.g., interest, dividends, investment earnings).

So doesn’t New Jersey’s treatment of 403(b) and 457 plans effectively make them Roth plans? No!

With traditional 401(k), 403(b) or 457(b) plans, contributions are generally deducted from the participant's salary and taxable income (i.e., on a pre-tax basis) and are taxed when withdrawn. If a Roth option is available under the plan, participants can use a Roth program option where contributions are made on an after-tax basis, and all distributions are tax-free if all other withdrawal requirements are met.

The way contributions to 403(b) and 457 plans work in New Jersey is that contributions are included in income in the year they are contributed. At withdrawal the proportion of the account balance representing contributions that were previously included in taxable income is now excluded from taxation.  However, the portion of the withdrawal attributable to interest, dividends and gains is taxable. Therefore, it is extremely important for 403(b) and 457 plans (and 401(k) participants prior to 1984) to keep track of contributions, to ensure that taxes on withdrawals are properly calculated.

What about Health Savings Accounts? 

One item notably excluded from the proposed legislation is pre-tax contributions to Health Savings Accounts (HSAs). New Jersey and California are the only two states that do not allow pre-tax deductions for HSAs.

Status of the Legislation

New Jersey Proposed Legislation Bill 4899 was introduced on Jan. 17, 2019, and referred to the State Financial Institutions and Insurance Committee for comment. The Bill is sponsored by Assemblyman Roy Freiman (District 16 - Hunterdon, Mercer, Middlesex and Somerset) Assemblyman Edward H. Thomson (District 30 - Monmouth and Ocean) Assemblyman Andrew Zwicker (District 16 - Hunterdon, Mercer, Middlesex and Somerset) Assemblyman Anthony M. Bucco (District 25 - Morris and Somerset). After review and proposed modifications by the committee, the bill must pass both Houses by a majority vote and be approved by the Governor.

It is interesting that New Jersey is not on par with other states. The tax laws requiring that contributions to these plans be subject to taxation can be perceived as discriminatory against teachers and nonprofit employees. There is also an opportunity for the bill to be modified to include health savings accounts for pre-tax treatment.

Contact your state legislative officials to express your support of the proposed bill and spread the word.

You may call or write to legislators at their district offices or write to them at:

c/o New Jersey Senate, State House
P.O. Box 099, Trenton, NJ 08625-0099 or

c/o New Jersey General Assembly, State House
P.O. Box 098, Trenton, NJ 08625-0098


The above article was provided for educational purposes. Everyone’s individual situation is different. See your tax professional or financial advisor on how the above article may impact you.


Chris J. Schiffer

Chris J. Schiffer

Chris Schiffer, AIF, CFP, CPA, MBA, is the executive vice president and COO of AEPG Wealth Strategies. He is the 2018/19 president of the NJCPA Middlesex/Somerset Chapter. Chris is also a member of the Financial Planning Association. He received a BS in accounting from Fordham University and his MBA in finance and international business from New York University’s Stern School of Business.