BILL ANALYSIS SENATE HEALTH COMMITTEE ANALYSIS Senator Elaine K. Alquist, Chair BILL NO: SJR 31 S AUTHOR: Alquist J AMENDED: As Introduced R HEARING DATE: May 5, 2010 CONSULTANT: 3 Chan-Sawin/ 1 SUBJECT Individuals with disabilities: tax exempt accounts SUMMARY Urges the President and Congress to immediately enact currently proposed federal legislation creating tax-exempt accounts for individuals with developmental disabilities. CHANGES TO EXISTING LAW Existing federal law: Provides incentives and subsidies through the tax system for various types of savings plans, such as 529 education savings plans. Existing state law: Conforms state law with federal law pertaining to tax-deferred 529 education savings plans. This resolution: Urges the President and Congress to immediately enact the Achieving a Better Life Experience Act of 2009 (ABLE Act), proposed in H.R. 1205, which creates tax-exempt accounts for individuals with developmental disabilities. FISCAL IMPACT This resolution is keyed non-fiscal. Continued--- STAFF ANALYSIS OF SENATE JOINT RESOLUTION 31 Page 2 BACKGROUND AND DISCUSSION According to the author, the ABLE Act would create disability savings accounts for individuals with disabilities and their families, as a way to save for future needs that would accrue interest tax-free. Many parents recognize that their children with developmental disabilities may live for many decades beyond the ability of the parents or other family members to provide financial assistance and support, and are seeking a means to ensure their financial security. If available, savings in ABLE accounts could be drawn upon for a variety of essential expenses including medical care, education, employment training, housing, transportation, and other life necessities. The federal government currently allows families to save for their children's future education needs through 529 college tuition savings plans. However, 529 plans do not meet the needs of families with children with developmental disabilities. There is currently no savings instrument specific to this population's needs. Asset development is one step toward improving economic self-sufficiency, and the federal legislation's focus on encouraging asset development will greatly incentivize people with disabilities to live more productive lives through earning and saving resources for their future. The ABLE Act of 2009 The Achieving a Better Life Experience Act of 2009 (also known as the ABLE Act of 2009) is a bipartisan effort proposed in H.R. 1205 and S. 493. If enacted, the ABLE Act would authorize the creation of tax-exempt accounts to benefit people with disabilities. The ABLE Act will enable families and individuals to provide funds for building resources for certain expenses of a beneficiary with disabilities, such as education, housing, transportation, employment support, medical care, life necessities, assistive technology and personal support services, and other government-approved expenses. There would be no age requirement on beneficiaries. STAFF ANALYSIS OF SENATE JOINT RESOLUTION 31 Page 3 There would be no federal taxation on funds held in an ABLE account. Individual states would ultimately determine how the funds are treated for state taxation purposes. Similar types of accounts like college savings and IRAs have been exempted from state taxation. Contributions to the accounts would be made on an after-tax basis, but assets in the account would be allowed to grow tax-free and are protected from being taxed as long as they are used to pay qualified expenses. Qualified expenses cover a broad range of needs and are flexible enough to be adapted to a beneficiary's unique needs, and include: Education, including tuition for preschool through post-secondary education, materials, books, supplies, special services, tutors, and special education services; Housing, including mortgage or rent payments, maintenance costs, utility payments, property taxes, and home modifications; Transportation, including vehicle purchase or modification, use of the public transportation system, and moving expenses; Employment support necessary to obtain and maintain employment, including job-related training, assistive technology, and personal assistance supports; Medical care, including premium and out-of-pocket expenses for medical, vision, and dental coverage, rehabilitation services, equipment, therapy, long-term services, and other health related expenses; Life necessities, including clothing, religious/cultural/recreational activities, community-based supports, and supplies and equipment for personal care, communication services and devices; adaptive equipment; assistive technology; personal assistance supports; financial management and administrative services; expenses for oversight, monitoring, or advocacy; funeral and burial expenses; and, STAFF ANALYSIS OF SENATE JOINT RESOLUTION 31 Page 4 Other approved expenses, as approved through federal regulations. Accounts opened under the ABLE Act are meant to supplement, not supplant benefits from private insurance and means-tested public benefit programs such as the Supplemental Security Income (SSI) program or Medicaid. Savings within the account and distributions from the account would be disregarded in determining eligibility for federally means-tested programs, if funds are spent for qualified expenses. In a manner similar to the treatment of Medicaid trusts, funds remaining in the ABLE account at an individual's death would be used to "pay-back" the state Medicaid program up to the value of services provided by the individual during life. 529 savings plans Federal and state governments provide incentives and subsidies through the tax system for certain types of savings plans. The federal government invests more than $367 billion a year to subsidize savings for retirement, homeownership and college education. Savings products such as IRAs, 401(k)s, and 529 savings plans provide tax benefits for targeted investments. Under federal law, Section 529 of the Internal Revenue Code provides tax-exempt status to "qualified tuition programs" (QTPs), commonly referred to as 529 savings plans. QTPs are programs established and maintained by a state, an agency, or an eligible educational institution to purchase tuition credits or make cash contributions on behalf of designated beneficiaries. No amount is included in the gross income of a contributor to, or a beneficiary of, a QTP with respect to any distribution from, or earnings under, such a program, except to the extent such distributions exceed qualified higher education expenses. Contributions made to a 529 savings plan are not deductible. California's 529 savings plan is the Golden State Scholarshare Savings Trust (Scholarshare). A unique characteristic of 529 savings plans is that any person, besides the beneficiary, may make contributions. ABLE accounts would also share this characteristic, STAFF ANALYSIS OF SENATE JOINT RESOLUTION 31 Page 5 allowing families to save for the needs of their loved ones with developmental disabilities. Currently, there are no tax-benefited savings options available for families to save for the needs of a person with disabilities. Related bills SB 323 (Oropeza) authorizes a taxpayer to direct any portion of their personal income tax refunds into a 529 savings account. Held in Assembly Appropriations Committee. AB 529 (Blumenfield) would, for taxable years beginning on or after January 1, 2010, authorize a deduction under that law for the amount, not to exceed $5,000 or $2,500, as specified, contributed to Scholarshare during the taxable year. Failed passage in Assembly Revenue and Taxation Committee. Prior legislation SB 643 (Florez) of 2007 would allow a deduction for contributions made by a qualified taxpayer to a QTP and require the board overseeing Scholarshare to make a one-time contribution to certain qualified tuition programs. Failed passage in Senate Revenue and Taxation Committee. AB 819 (Runner) of 2007 was similar to SB 643 (Florez) of 2007 in regard to allowing a deduction for contributions made by a qualified taxpayer to certain QTPs. Failed passage in Assembly Revenue and Taxation Committee. SB 30 (Speier) of 2005 was similar to this bill in regard to allowing qualified taxpayers a deduction for contributions made to a QTP. Failed passage in Senate Revenue and Taxation Committee. AB 3 (Blakeslee) of 2005 was similar to this bill in regard to allowing qualified taxpayers a deduction for contributions made to a QTP. Failed passage in Assembly Revenue and Taxation Committee. AJR 6 (Canciamilla), Resolution Chapter 121, Statutes of 2002, urges the President and Congress to enact legislation similar to the Retirement Security and Savings Act of 2000, which would have raised contribution limits and expanded STAFF ANALYSIS OF SENATE JOINT RESOLUTION 31 Page 6 pension portability among various types of governmental retirement savings plans. SB 1262 (O'Connell), Chapter 664, Statutes of 1999, made a number of technical changes to Scholarshare, including making the Scholarshare Investment Board responsible for administering the program instead of the Student Aid Commission. AB 2797 (Cardoza), Chapter 322, Statutes of 1998, allows, by direct conformity to the federal provisions, an exemption from state taxation and tax-deferred treatment for contributions to and earnings from any state's qualified state tuition program. COMMENTS Proposed technical and clarifying amendments: 1.Page 1, after the title, strikeout "Introduced by Senator Alquist" and replace with "Introduced by Senators Pavley and Alquist" 2.Page 1, line 4, delete "H.R. 1205," 3.Page 1, line 5, insert after first comma "proposed in H.R. 1205 and S. 493" POSITIONS Arguments in support The resolution's co-sponsors, the Alliance of Autism Organizations, an association of 44 non-profit autism groups throughout California, and the Association of Regional Center Agencies, write in support, stating that the federal legislation is important to improving the lives of people with developmental disabilities. Support: Alliance of Autism Organizations (co-sponsor) Association of Regional Center Agencies (co-sponsor) Oppose: None received STAFF ANALYSIS OF SENATE JOINT RESOLUTION 31 Page 7 -- END --