It doesn’t matter who the money belongs to. Municipalities do not have the authority to tax 401k money. If your company doesn’t have the guts to call the taxing entity on the carpet shame on them. I bet money they (city govt) doesn’t tax income on annuities that are in the accumulation phase say like that held by NY Life. They would get smacked down like a gnat!
I vaguely remember California being rather slow to adobt federal IRA contribution limit changes a few years ago. I think they finally got around to meeting the federal limits. It caused quite a stink for a while.