BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 242
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          Date of Hearing:  March 21, 2011

                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                                Henry T. Perea, Chair

           AB 242 (Committee on Revenue and Taxation) - As Amended:  March 
                                      14, 2011


                                      VOTE ONLY

          
          Majority vote.  Tax levy.  Fiscal committee.

           SUBJECT  :  Income tax conformity:  federal health care. 

           SUMMARY  :  Conforms several provisions of the Personal Income Tax 
          (PIT) Law to specified provisions of the federal Patient 
          Protection and Affordable Care Act of 2010 (PPACA) and the  
          Health Care and Education Reconciliation Act of 2010 (HCERA).  
          Specifically,  this bill :  

          1)Provides that, for taxable years beginning on or after January 
            1, 2013, a simple cafeteria plan created by a certain small 
            employer for its employees would be treated as having 
            satisfied the nondiscrimination rules of a classic cafeteria 
            plan;

          2)Allows small employers to offer exchange-participating health 
            plans through cafeteria plans effective in 2014.

          3)Increases, for taxable years beginning on or after January 1, 
            2010, the amount of qualified adoption expenses excludable 
            from an employee's gross income by $1,000.

          4)Excludes from income certain qualified health care benefits 
            provided after March 30, 2010, to a member of an Indian tribe, 
            the member's spouse, or the member's dependents.  

          5)Excludes from a qualified employee's income the value of a 
            specified free-choice voucher if it is used to purchase a 
            health plan, and allows the employer to deduct the value of 
            the voucher as compensation for personal services actually 
            rendered. 









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          6)Excludes from gross income and the alternative minimum taxable 
            income, for taxable years beginning on or after January 1, 
            2009, a federal grant for a qualifying therapeutic discovery 
            project undertaken by the taxpayer in a tax year beginning in 
            2009 or 2010.

          7)Excludes from income, for taxable years beginning on or after 
            January 1, 2010, certain payments received by an individual 
            taxpayer under the National Health Service Corps loan 
            repayment or forgiveness programs. 

           EXISTING FEDERAL LAW  :

          1)Imposes certain "non-discrimination" requirements on cafeteria 
            plans and certain qualified benefits to prevent discrimination 
            in favor of highly-compensated individuals as to eligibility 
            for benefits and to actual contributions and the amount of 
            benefits provided.  Provides, for taxable years beginning on 
            or after January 1, 2011, a safe harbor from the 
            nondiscrimination requirements of a cafeteria plan for certain 
            small employers.  

          2)Excludes from taxation certain qualified benefits under a 
            cafeteria plan and provides that reimbursement or direct 
            payment for the premiums for coverage under any qualified 
            health plan offered through an exchange is a qualified benefit 
            under a cafeteria plan if the employer is a qualified 
            employer. 

          3)Provides an exclusion from employee's gross income for 
            qualified adoption expenses paid or reimbursed by an employer 
            under an adoption assistance program.  For taxable years 
            beginning on or after January 1, 2010, the maximum exclusion 
            was increased to $13,170 per eligible child. 

          4)Provides an exclusion from income for certain health care 
            benefits, including the value of specified Indian tribe health 
            care benefits provided after March 30, 2010.  

          5)Excludes from an employee's income the value of contributions 
            made by his/her employer to the employee's health care and 
            allows the employer to deduct the contributions.  It also 
            excludes from employee's income free choice vouchers and 
            allows the employer a deduction for the vouchers.









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          6)Excludes from income any grant received in lieu of a tax 
            credit for a qualified therapeutic discovery project. 

          7)Excludes from gross income an amount from the forgiveness of 
            certain student loans, to the extent that the forgiveness is 
            contingent on the student's working for a certain period of 
            time in certain professions for any of a broad class of 
            employers.  Modifies this exclusion for amounts received under 
            the National Health Service Corps loan repayment program or 
            certain state loan repayment programs. 
           
          EXISTING STATE LAW  :

          1)Conforms, for taxable years beginning on or after January 1, 
            2010, to the federal tax exclusion for qualified adoption 
            expenses paid or reimbursed by an employer under an adoption 
            assistance program.

          2)Conforms to the general federal welfare doctrine and the 
            exclusion of certain health care benefits from gross income.  
            Exempts from taxation income received by an Indian tribal 
            member who lives in that tribe's Indian country and such 
            income is sourced in the tribal member's Indian country.  

          3)Excludes from income an employer's contributions for its 
            employee's health care and allows employers to deduct the 
            contributions.

           FISCAL EFFECT  :  The Franchise Tax Board (FTB) staff estimates 
          that this bill will result in an annual loss of approximately $4 
          million in fiscal year (FY) 2010-11, $3 million in FY 2011-12, 
          $461,000 in FY 2012-13, and $55.5 million in FY 2013-14. 

           COMMENTS  :  Committee staff notes all of the following:

           1)Establishment of Simple Cafeteria Plans for Small Businesses  .  
            Under existing law, an employer may establish a "cafeteria 
            plan" - a separate written plan under which all participants 
            are employees and are permitted to choose among at least one 
            taxable benefit (e.g., current cash compensation) and at least 
            one "qualified benefit". "Qualified benefits" are 
            employer-provided benefits that are not taxable, such as, for 
            example, group term life insurance coverage not in excess of 
            $50,000 and benefits under a dependent care assistance 
            program.  Cafeteria plans and certain qualified benefits are 








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            subject to non-discrimination requirements.  The basic purpose 
            of those requirements is to prevent the provision of 
            disproportionate benefits to highly-compensated employees.  A 
            failure to satisfy the nondiscrimination rules, generally, 
            results in a loss of the tax exclusion by the 
            highly-compensated individuals.  For taxable years beginning 
            on or after January 1, 2013, the PPACA (Public Law 111-148) 
            allows certain small employers to provide a simple cafeteria 
            plan for their employees, under which the nondiscrimination 
            rules of a classic cafeteria plan would be treated as 
            satisfied.  A small business is an employer that, during 
            either of the two preceding years, employed an average of 100 
            or fewer employees on business days.

          This bill would conform California's income tax law to the 
            federal change under the PPACA to provide small employers a 
            safe harbor from the nondiscrimination requirements of a 
            cafeteria plan.  The safe harbor would apply to taxable years 
            beginning on or after January 1, 2011. 

           2)Offering of Exchange-Participating Qualified Health Plans 
            Through Cafeteria Plans  .  For taxable years beginning after 
            December 31, 2013, reimbursement or direct payments for the 
            premiums for coverage under any qualified health plan offered 
            through an exchange is a qualified benefit under a cafeteria 
            plan if the employer is a qualified employer (Section 1515 of 
            the PPACA).  A qualified employer, generally, is a small 
            employer that elects to make all its full-time employees 
            eligible for one or more qualified plans offered in the small 
            group market through an Exchange.   This bill would conform 
            California's tax laws to the federal definition of "qualified 
            benefits" to include reimbursement and direct payments for the 
            premiums for qualified health plan offered through an Exchange 
            under a qualified employer's cafeteria plan. 

           3)Adoptions Assistance Exclusion  .  Under federal tax law, an 
            employee may exclude from his/her gross income qualified 
            adoption expenses paid or reimbursed by an employer under an 
            adoption assistance program.  The PPACA increased the amount 
            of qualified adoption expenses excludable from gross income to 
            $13,170, for taxable years beginning on or after January 1, 
            2010.  The maximum amount is phased out ratably for taxpayers 
            with modified adjusted gross income between $182,520 and 
            $222,520. 
           








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           4)Health Care Benefits of Indian Tribe Members  .  Under the 
            PPACA, qualified health care benefits provided to a member of 
            an Indian tribe, the member's spouse, or the member's 
            dependents are excludable from the member's gross income, for 
            benefits and coverage provided after March 30, 2010.  The 
            exclusion applies to the value of a) health services or 
            benefits provided or purchased by the Indian Health Service 
            (HIS) through a grant to or a contract or compact with an 
            Indian tribe or tribal organization, or through programs of 
            third parties funded by the HIS; b) medical care provided by 
            an Indian tribe or tribal organization to a member of an 
            Indian tribe, including the member's spouse or dependents; c) 
            accident or health plan coverage provided by an Indian tribe 
            or tribal organization for medical care to a member of an 
            Indian tribe, including the member's spouse or dependents; and 
            d) any other medical care provided by an Indian tribe or 
            tribal organization that supplements, replaces, or substitutes 
            for the programs and services provided by the federal 
            government to Indian tribes or Indians. 

          This bill would allow the same tax treatment for those benefits 
            under the PIT Law. 

           5)Free Choice Vouchers  .  Under the PPACA, for taxable years 
            beginning on or after January 1, 2014, an employer who offers 
            minimum essential coverage to its employees through an 
            employer-sponsored plan must provide employees, who choose not 
            to participate in the employer's health plan, with vouchers 
            that can be used to purchase health plans on the exchange.  
            Only employees who must contribute more than 8% of income for 
            the minimum employer-sponsored plan, and whose total household 
            income does not exceed 400% of the poverty line are eligible 
            for free choice vouchers.  The value of the voucher is equal 
            to the employer's contribution to its health plan.  The 
            federal tax law excludes from an employee's income the value 
            of contributions made by employers to the employee's health 
            care and allows employers to deduct the contributions.  It 
            also provides that free choice vouchers are excluded from 
            employee's income and are allowed as a deduction to the 
            employer.

          This bill, for purposes of the state income tax laws, would 
            exclude the value of a free choice voucher from an employee's 
            income to the extent it is used to purchase a health plan, and 
            would allow the employer to deduct the value of the voucher as 








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            compensation for personal services actually rendered.  

           6)Therapeutic Discovery Project Grants  .  Under the PPACA, a 50% 
            tax credit is allowed as part of the federal investment credit 
            for eligible taxpayers' qualified investment with respect to 
            any qualifying therapeutic discovery project made in a tax 
            year beginning in 2009 or 2010.  The federal tax credit is 
            available only to companies with 250 or fewer employees. 
            Companies can apply to have their research projects certified 
            as eligible for the credit or grant - in lieu of the credit - 
            which can be excluded from the taxpayer's gross income.  A 
            "qualifying therapeutic discovery project" is a project that 
            is designed to develop a product, process, or therapy to 
            diagnose, treat or prevent diseases and afflictions, as 
            specified.  This provision allocates $1 billion for the 
            program during 2009 and 2010.  

          This bill would provide an exclusion from income for such grants 
            under California's tax laws, for taxable years beginning on or 
            after January 1, 2009. 

           7)Student Loan Repayment Program.   Gross income generally 
            includes the discharge of indebtedness of the taxpayer.  Under 
            an exception to this general rule, gross income does not 
            include any amount from the forgiveness of certain student 
            loans, provided that the forgiveness is contingent on the 
            student's working for a certain period of time in certain 
            professions for any of a broad class of employers.  The new 
            federal law (Internal Revenue Code Section 108) modifies the 
            gross income exclusion for amounts received under the National 
            Health Service Corps loan repayment program and certain state 
            loan repayment programs to include any amount received by an 
            individual under any state loan repayment or loan forgiveness 
            program that is intended to provide for the increased 
            availability of health care services in underserved or health 
            professional shortage areas (as determined by the state).  
            Thus, under the PPACA, for taxable years beginning on or after 
            January 1, 2010, individuals are allowed to exclude from 
            income certain payments received under the National Health 
            Service Corps loan repayment or forgiveness programs.  This 
            bill would also exclude from gross income those types of 
            payments for purposes of the PIT Law. 

                
           REGISTERED SUPPORT / OPPOSITION  :   








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           Support 
           
          California Society of Enrolled Agents

           Opposition 
           
          None on file
           
          Analysis Prepared by  :  Oksana Jaffe / REV. & TAX. / (916) 
          319-2098