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 :
AB 242
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Support
California Society of Enrolled Agents
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098