BILL ANALYSIS
AB 2292
Page 1
Date of Hearing: April 28, 2008
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles Calderon, Chair
AB 2292 (Garrick) - As Introduced: February 21, 2008
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Personal income tax: Health Savings Account (HSA):
deductions
SUMMARY : Conforms to federal tax law with respect to health
savings accounts (HSAs) for taxable years beginning on or after
January 1, 2008. Specifically, this bill :
1)Allows eligible individuals to claim a deduction related to
their contributions to HSAs in computing their adjusted gross
income (AGI).
2)Treats an HSA as a tax-exempt trust for tax purposes.
3)Excludes from the gross income of the employee any
contributions to an HSA made by an employer on the employee's
behalf.
4)Includes HSAs as an approved option in a nontaxable cafeteria
plan for employee benefits created by an employer.
5)Adopts federal changes enacted in 2006 that enhance the HSAs
by:
a) Permitting the funds remaining upon termination of
health flexible spending arrangements or health
reimbursements arrangements to be transferred to HSAs.
b) Revising the annual deductible limitation on
contributions to HSAs to disregard the amount of the annual
deductible under the high deductible health plan (HDHP).
c) Modifying the cost-of-living adjustments for Consumer
Price Index for a calendar year to use the 12-month period
ending on March 31 of the calendar year rather than the
12-month period ending on August 31, of the preceding
AB 2292
Page 2
calendar year.
d) Eliminating the requirement to prorate the amount of HSA
contribution based on the number of months of enrollment in
an HDHP for an individual who becomes covered under the
HDHP during the taxable year in a month other than January.
e) Enacting an exception to the requirement for comparable
contributions by employers to permit employers to make
larger contributions for non-highly compensated employees
than for highly compensated employees.
f) Permitting participants to make a one-time distribution
from an individual retirement account (IRA) to fund an HSA.
g) Allows a taxpayer to rollover the balance of an existing
Archer medical savings account (Archer MSA) to an HSA for
taxable years beginning on or after January 1, 2008.
h) Imposes a penalty for a disqualified distribution equal
to 2 % of the distribution amount, rather than 10% as
provided by federal law.
i) Does not conform to the federal 6% excise tax on excess
contributions.
j) Imposes a $50 penalty for failing to make required
reports.
6)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW:
1)Defines an HSA as a tax-exempt trust or custodial accounts
created exclusively to pay for the qualified medical expenses
of the account holder and his/her spouse and dependents.
2)Allows any balance in an HSA to grow on a tax-free basis.
3)Allows individuals with an HDHP, and no other health plan
other than a plan that provides certain permitted coverage, to
establish an HSA.
4)Allows a deduction for contributions to HSAs when computing
AB 2292
Page 3
AGI, if made by an eligible individual. Distributions from an
HSA for qualified medical expenses of the eligible individual,
spouse or dependents are not includible in gross income.
5)Defines "qualified medical expenses" as medical expenses
including expenses for diagnosis, cure, mitigation, treatment,
or prevention of disease, including prescription drugs,
transportation primarily for and to such care, and qualified
long-term care expenses. Distributions made for non-qualified
medical expenses are includible in gross income and also
subject to an additional 10% tax, unless the distributions are
made after death, disability, or after the individual attains
the age of Medicare eligibility.
6)Specifies that medical expenses paid via distributions that
are excludable from income may not be claimed as medical
expenses for purposes of reporting itemized deductions.
7)Excludes contributions to an HSA from income and employment
taxes if made by the employer. Eligible individuals include
those covered by high-deductible health plans and, in general,
are not eligible for other health coverage.
8)Specifies the maximum aggregate annual contribution that may
be made to an HSA by or on behalf of the eligible individual,
which is, for 2007, $2,850 in the case of self-only coverage
and $5,650 in the case of family coverage. Those limits are
indexed for inflation. For taxpayers who are 55 years or
older during the taxable year, the maximum annual HSA
contribution was increased by $500 in 2004, increasing each
year by $100 until it reaches $1,000 in 2009 and thereafter.
9)Allows employers to make larger HSA contributions for
non-highly compensated employees than for highly compensated
employees.
10)Includes the balance remaining in an HSA after the death of
the eligible individual in the gross estate of the decedent
unless the decedent's spouse is the beneficiary of the HSA.
In that case, the HSA balance is deducted in computing the
taxable estate and the HSA passes to the surviving spouse,
subject to the general restrictions on, and taxation of,
distributions.
AB 2292
Page 4
11)Imposes numerous reporting requirements related to HSAs.
Employer contributions to the HSAs must be reported on the
employees Form W-2. In addition, the trustee of the HSA must
report information on distributions, contributions, and other
required information to the Secretary of the Treasury. Health
insurance providers must report information as required by the
Secretary of the Treasury.
12)Authorizes a direct transfer of funds from the health
Flexible Spending Arrangements (FSAs) or Health Reimbursement
Arrangements (HRAs) to an HSA, but limits the amount that may
be transferred to an amount equal to the lesser of (a) the
balance in the health FSA or HRA as of September 21, 2006, or
(b) the balance in the health FSA or HRA as of the date of the
transfer.
13)Authorizes a one-time contribution to an HSA of amounts
distributed from an IRA as a direct trustee-to-trustee
transfer. Excludes the transfer amount from the gross income
of the accountholder and from the 10% penalty on early IRA
distributions.
14)Allows tax-benefited medical accounts called Archer MSAs.
The Acher MSAs create a tax-exempt trust or custodial account
for the benefit of the account holder. Rules similar to those
for IRAs apply to the Archer MSAs. Archer MSAs do not provide
the assistance needed by many working families and do not
receive widespread support or participation. As part of the
legislation enacting HSAs, participants of Archer MSAs are
able to transfer or rollover their balances from the Archer
MSAs to a new HSA. This transfer specifically is not treated
as a disqualifying distribution.
EXISTING STATE LAW allows tax-benefited growth and use of funds
for qualified medical expenses, conforming to the federal rules
for Archer MSAs. However, California has not adopted the HSAs
created as part of the 2003 federal legislation. Due to the
lack of conformity, California taxpayers will be disadvantaged
financially if they rollover (transfer) their Archer MSAs to
HSAs. Although specifically approved for federal tax purposes,
the transfer is a disqualified distribution for California tax
purposes, includable in income and subject to tax as well as an
additional 10% penalty. Similarly, transfers of funds from IRAs
will be treated as income subject to tax, and potentially
AB 2292
Page 5
subject to the 2 % penalty for early distribution.
FISCAL EFFECT : The Franchise Tax Board (FTB) staff estimate a
revenue loss from this bill of $40 million in fiscal year (FY)
2008-09, $45 million in FY 2009-10, and $55 million in FY
2010-11.
PROPOSITION 98 FISCAL EFFECT : Committee staff estimate a
reduction in funding for K-14 schools of $16 million in FY
2008-09, and $18 million in FY 2009-10, and $22 million in FY
2010-11.
COMMENTS :
1)The author states that, "Health Savings Accounts were created
with the passage of the 2003 Medicare bill signed by President
Bush. HSAs allow for individuals to plan ahead for qualified
medical expenses on a tax-free basis. HSAs have also been
used to defray the costs associated with High Deductible
Health Plan. HDHPSs and HSAs give individuals further
flexibility when determining what type of health care coverage
is best for them. HSAs and HDHPs offer consumers security,
affordability, flexibility, and they are 100% portable. By
encouraging contributions to HSAs, we make insurance that much
more affordable.
"AB 2292 encourages the use of HSAs by allowing for a tax
deduction for contributions made to an HAS by, or on behalf
of, an eligible individual. AB 2292 would extend to option of
contributing to any eligible HSA to employers who may be
interested in exploring cost-effective ways to help employees
defray medical expenses.
"Encouraging the uninsured to purchase health insurance by
allowing this tax deductible option, will reduce the number of
uninsured, and accordingly, reduce costs associated with
providing healthcare to the uninsured. Reducing healthcare
costs will make healthcare insurance more affordable for all.
Furthermore, allowing employers to contribute to
tax-deductible HSAs on behalf of their employees provides a
low-cost mechanism to offer their employees an additional
benefit. Many employers would provide some form of health
benefit to their employees if it were cost efficient.
AB 2292
Page 6
"This is a simple conformity measure, bringing California in
line with federal HSA provisions. Currently, California is
one of only five states that taxes contributions to Health
Savings Accounts. Given our current healthcare crisis, we
should be creating incentives for people to save for future
healthcare costs, and AB 2292 creates one such incentive."
2)Proponents state that, in light of the skyrocketing cost of
healthcare, California taxpayers are continually searching for
help in easing the high price of health services. Proponents
contend that HSAs, when combined with HDHPs, present an option
for business to provide some health insurance for employees
rather than none at all. Proponents point to the growth of
HSA use and cite data that shows almost a third of all
HSA/HDHP purchases were made by those previously uninsured.
According to proponents, use of HSAs help individuals take
control of how their health care dollars are spent, and enable
them to save for future medical expenses and retiree-health
expenses on a tax-free basis. Proponents state that HSAs
improve upon existing tax-deductible saving options because
both the employer and employee may contribute to an employee's
HSA without increasing the employee's taxable income. Also,
unspent funds rollover from year to year and move with an
employee. Because California is one of only four states that
do not permit HSAs, California employees of multistate or
multinational employers will not enjoy the tax advantages of
HSAs, thereby paying more for the same medical coverage.
Finally, the proponents argue that this measure will save
California taxpayers much confusion and heartache in filling
out their income tax forms.
3)Opponents state this bill amounts to a tax giveaway for
holders of HSAs because they already have the financial
resources to afford health insurance. According to the
opponents, this bill would benefit only high wage earners, as
demonstrated in a January 2006 report from the Government
Accountability Office, and would do nothing to make health
care more affordable for the uninsured and low-income earners
or will force people on Medicare or other assistance programs
to buy care they cannot afford.
Opponents also argue that HSAs actually limit consumer choice
and ultimately cost low- and middle-income workers more money
AB 2292
Page 7
because HSAs must be coupled with HDHPs. Opponents state that
HDHPs are bad for workers as they discourage sick workers and
their families from seeking care for routine illnesses,
potentially leading to subsequent health care costs that are
much higher than they would have been with early treatments.
Opponents state that this cycle of high barriers to care and
worsening illnesses hurts working families. Opponents contend
that HSAs hurt the health system as a whole because the health
system needs to spread its risk. Taking healthy individuals
out of the insurance pool increases the cost to those in need
of more extensive health insurance.
Finally, opponents argue that this measure would result in a
revenue loss that could impact the provision of critical
firefighting and public safety services and that health care
costs must be dealt with by containing health care costs,
harnessing the power of group purchasing and regulating health
insurers more efficiently.
4)Committee staff notes that the issue of conformity to federal
HSA legislation has been proposed in every legislative session
since the federal law was enacted.
AB 84 (Nakanishi/Smyth), introduced in the 2007-08 legislative
session, is identical to this bill. AB 84, as amended on
March 12, 2007, and was held in this committee.
AB 142 (Plescia), introduced in the 2007-08 legislative session,
is nearly identical to this bill. That bill would conform to
federal HSA provisions starting with taxable year 2008, which
is the same as this bill; however, AB 142 specified a
different nonconformity period than this bill. AB 142 was
held in the Senate Revenue and Taxation Committee.
AB 245 (DeVore), introduced in the 2007-08 legislative session,
is identical to AB 142. AB 245 was held in this committee.
ABx1 4 (Nakanishi), introduced in the 2007-08 legislative
session, is identical to this bill. ABx1 4, as introduced on
September 18, 2007, and is at the Assembly Desk.
SB 25 (Maldonado and Runner), introduced in the 2007-08
legislative session, is identical to this bill. SB 25 was
held in the Senate Revenue and Taxation Committee.
AB 2292
Page 8
SBx1 10 (Maldonado), introduced in the 2007-08 legislative
session, is nearly identical to this bill, except that
conformity to the federal HSA provisions would apply starting
with taxable year 2006. SBx1 10 failed to pass the Senate
Health Committee.
5)Committee staff notes that, because California has not
conformed to any of the federal HSA provisions, a taxpayer
taking a deduction on his/her federal personal income tax
return is required to increase his/her AGI on the California
personal income return by the amount of that deduction. In
addition, any interest earned on the HSA account must be added
to the taxpayer's AGI for California tax purposes, and any
contributions made by the taxpayer's employer to the HSA, must
be included in the taxpayer's AGI.
6)Committee staff notes that, similarly to AB 84 (Nakanishi)
from the 2007-08 legislative session, this bill does not
address the impact of HSAs that have been or will be created
before the operative date of this bill. As noted in our
analysis of AB 84, "without addressing the tax treatment of
HSAs created before 2008, there might be implementation
concerns because part of the HSA will be pre-tax dollars and
part will be post-tax dollars. Additional legislation or
regulations would be required to provide guidance to FTB with
respect to treatment of qualified and disqualified
distributions from such HSAs. Because California is one of
only four states that have not adopted HSAs, there may be
implementation concerns from employees that move into
California from a conforming state."
7)Committee staff notes that California has already conformed to
the federal rules applicable to MSAs and currently allows a
deduction for the contribution amount to an MSA as reported on
the taxpayer's federal income tax return. Committee staff,
therefore, suggest that Sections 5 and 6 of this bill be
deleted, as proposed by FTB. Specifically:
FTB recommends the following amendments:
AMENDMENT 1
On page 3, strikeout lines 1 to 28.
AB 2292
Page 9
AMENDMENT 2
On page 3, line 29, after SEC., strikeout "7" and insert: 5
AMENDMENT 3
On page 3, line 37, after SEC., strikeout "8" and insert: 6
AMENDMENT 4
On page 4, line 5, after SEC., strikeout "9" and insert: 7
AMENDMENT 5
On page 4, line 26, after SEC., strikeout "10" and insert: 8
AMENDMENT 6
On page 4, line 38, after Section, strikeout "233(h)" and
insert: 223(h)
AMENDMENT 7
On page 5, line 28, after SEC., strike out "11" and insert: 9
REGISTERED SUPPORT / OPPOSITION :
Support
The California Taxpayers' Association
The Association of California Life and Health Insurance
Companies
The National Association of Insurance and Financial Advisors of
California
The California Manufacturers and Technology Association
America's Health Insurance Plans
The California Restaurant Association
Opposition
California Professional Firefighters
California Labor Federation
Health Access California
The California School Employees Association, AFL-CIO
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098