BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     AB 449


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          Date of Hearing:  April 13, 2015





                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                                 Philip Ting, Chair





          AB 449  
          (Irwin) - As Amended March 19, 2015


          


          Majority vote.  Fiscal committee.


          SUBJECT:  Income taxation:  savings plans:  Qualified ABLE  
          Program


          SUMMARY:  Establishes a California Achieving a Better Life  
          Experience (ABLE) program, and generally conforms income tax law  
          to the federal income tax treatment of ABLE accounts.   
          Specifically, this bill:  


          1)Conforms, with specified modifications, the Personal Income  
            Tax (PIT) Law and the Corporations Tax (CT) Law to the  
            Internal Revenue Code (IRC) Section 529A, relating to  
            qualified ABLE programs.








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          2)Provides that a copy of the report required to be filed with  
            the Secretary of the Treasury (Secretary) under IRC Section  
            529A shall be filed, at the same time and in the same manner,  
            with the Franchise Tax Board (FTB).


          3)Establishes a qualified ABLE program and the qualified ABLE  
            fund for purposes of implementing the federal ABLE Act  
            pursuant to IRC Section 529A.


          4)Provides that the Treasurer shall administer the ABLE program  
            and shall be responsible for ensuring that the program is in  
            compliance with the requirements of the federal ABLE Act.


          5)Allows a person to make contributions for a taxable year, for  
            the benefit of an eligible individual for that taxable year,  
            to an ABLE account that is established for the purpose of  
            meeting the qualified disability expenses of the designated  
            beneficiary of the account, if both of the following are met:


             a)   The designated beneficiary is limited to one ABLE  
               account; and 


             b)   The ABLE account is established only for a designated  
               beneficiary who is a resident of California.


          6)Provides that, notwithstanding any other law, money in an ABLE  
            account shall not count towards determining eligibility for  
            state or local means-tested programs.


          7)Defines an "ABLE account" or an "account" as an account to  








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            which an eligible individual makes contributions for the  
            purpose of meeting the qualified disability expenses of the  
            designated beneficiary of the account.


          8)Defines an "ABLE fund" or a "fund" as a fund established for  
            purposes of implementing the federal ABLE Act.


          9)Defines an "eligible individual" as an individual who is  
            eligible under a qualified ABLE program for a taxable year if  
            during that taxable year both of the following are met:


             a)   The individual is entitled to benefits based on  
               blindness or disability under Title II or XVI of the  
               federal Social Security Act, and that blindness or  
               disability occurred before the date on which the individual  
               attained the age of 26; and,


             b)   A disability certification, as defined in the federal  
               ABLE Act, is filed pursuant to the requirements set forth  
               in the federal ABLE Act.


          10)Defines a "designated beneficiary" as the eligible individual  
            who established an ABLE account and is the owner of the  
            account.


          11)Defines the "federal ABLE Act" as the federal Stephen Beck  
            Jr., Achieving a Better Life Experience Act of 2014.


          12)Defines a "qualified ABLE program" or a "program" as a  
            program established to implement the federal ABLE act pursuant  
            to IRC Section 529A.









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          13)Defines "qualified disability expenses" as any expenses  
            related to the eligible individual's blindness or disability  
            that are made for the benefit of an eligible individual who is  
            the designated beneficiary.  These expenses include education,  
            housing, transportation, employment training and support,  
            assistive technology and personal support services, health,  
            prevention and wellness, financial management and  
            administrative services, legal fees, expenses for oversight  
            and monitoring, funeral and burial expenses, and other  
            expenses, which are approved by the Secretary of the Treasury  
            under regulations and consistent with the purposes of the  
            federal ABLE Act.


          14)Provides that the Treasurer shall adopt regulations to track  
            all ABLE accounts in California and may adopt further  
            regulations to implement this program.


          EXISTING FEDERAL LAW:  


          1)Provides tax-exempt status to qualified tuition programs.   
            Qualified tuition programs are programs established and  
            maintained by a state (or by an eligible education  
            institution) under which a person may purchase tuition credit  
            or make cash contributions to meet the qualified higher  
            education expenses of a designated beneficiary.  Contributions  
            to a QTP cannot exceed the amount necessary to provide for the  
            beneficiary's qualified higher education expenses.   
            Distributions to a beneficiary are excluded from income.   
            However, contributions made to a QTP are not deductible.


          2)Provides a qualified ABLE program under the ABLE Act of 2014  
            for taxable years beginning on or after January 1, 2015.  A  
            qualified ABLE program is a program established and maintained  
            by a state, or agency or instrumentality of the state.  A  








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            qualified ABLE program is generally exempt from income tax,  
            but is otherwise subject to the taxes imposed on the unrelated  
            business income of tax-exempt organizations.  A qualified ABLE  
            program must meet the following conditions: 


             a)   Under the provisions of the program, contributions may  
               be made to an ABLE account, established for the purpose of  
               meeting the qualified disability expenses of the designated  
               beneficiary of the account; 


             b)   The program must limit a designated beneficiary to one  
               ABLE account; 


             c)   The program must allow for the establishment of ABLE  
               accounts only for a designated beneficiary who is either a  
               resident of the state maintaining such ABLE program or a  
               resident of a state that has not established an ABLE  
               program which has entered into a contract with such state  
               to provide the contracting state's residents with access to  
               the state's ABLE program; and, 


             d)   The program must meet other specified requirements.


          3)Provides that contributions to an ABLE account must be made in  
            cash and are not deductible for federal income tax purposes.   
            Except in the case of a rollover contribution from another  
            account, an ABLE account must provide that it may not receive  
            aggregate contributions during a taxable year in excess of the  
            annual gift tax exclusion amount.  For 2015, the annual gift  
            tax exclusion amount is $14,000.  Additionally, a qualified  
            ABLE program must provide adequate safeguards to ensure that  
            ABLE account contributions do not exceed the limit imposed on  
            accounts under the qualified tuition program of the state  
            maintaining the qualified ABLE program.  Amounts in the  








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            account accumulate on a tax-deferred basis (i.e., income on  
            accounts in the plan is not subject to current income tax).


          4)Provides that distributions from an ABLE account are  
            excludable from income to the extent that the total  
            distribution does not exceed the qualified disability expenses  
            of the beneficiary during the taxable year.  If a distribution  
            from an ABLE account exceeds the qualified disability expenses  
            of the beneficiary, a pro-rata portion of the distribution is  
            excludable from income.  The portion of any distribution that  
            is includible in income is subject to an additional 10 percent  
            tax unless the distribution is made after the death of the  
            beneficiary.  Amounts in an ABLE account may be rolled over  
            without income tax liability to another ABLE account for the  
            same beneficiary or another ABLE account for the designated  
            beneficiary's brother, sister, stepbrother or stepsister who  
            is also an eligible individual.


          5)Provides that a contribution to an ABLE account is treated as  
            a completed gift of a present interest to the beneficiary of  
            the account.  Such contributions qualify for the per-donee  
            annual gift tax exclusion ($14,000 for 2015) and, to the  
            extent of such exclusion, are exempt from the  
            generation-skipping transfer (GST) tax.  A distribution from  
            an ABLE account generally is not subject to gift tax or GST  
            tax.  


          6)Defines an "eligible individual" as either:


             a)   An individual for whom a disability certification has  
               been filed with the Secretary for the taxable year; or,


             b)   An individual who has been determined, for purposes of  
               Social Security Disability Insurance benefits or  








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               Supplemental Security Income (SSI) benefits to meet the  
               requirements relating to disability or blindness under the  
               SSI program.  In general, an individual must be either  
               blind or disabled, and the blindness or disability must  
               have occurred before the date on which the individual  
               attained age 26.


          7)Provides that earning on distributions from an ABLE account  
            are only untaxed to the extent total distributions do not  
            exceed the qualified disability expenses of the designated  
            beneficiary.  For these purposes, qualified disability  
            expenses are any expenses related to the eligible individual's  
            blindness or disability which are made for the benefit of the  
            designated beneficiary.  Such expenses include the following:  
            education, housing, transportation, employment training and  
            support, assistive technology and personal support services,  
            health, prevention and wellness, financial management and  
            administrative services, legal fees, expenses for oversight  
            and monitoring, funeral and burial expenses, and other  
            expenses, which are approved by the Secretary under  
            regulations and consistent with the purposes of this  
            provision.


          8)Provides that each officer or employee having control of the  
            qualified ABLE program (or their designees) is required to  
            make reports to the Secretary and to the designated  
            beneficiaries of ABLE accounts.  Such reports must provide  
            information with respect to contributions, distributions, the  
            return of excess contributions, and other matters as required  
            by the Secretary.  In addition, for research purposes, such  
            officers and employees shall make available to the public and  
            provide to the Secretary, reports containing aggregate  
            information, by diagnosis and other relevant characteristics,  
            on contributions and distributions.


          9)Provides, notwithstanding any other provision of federal law  








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            that requires the consideration of one or more financial  
            circumstances of an individual, for the purpose of determining  
            eligibility to receive, or the amount of, any assistance or  
            benefit authorized by such provision to be provided to or for  
            the benefit of such individual, any amount (including  
            earnings) in an ABLE account of the individual, any  
            contributions to an ABLE account of the individual, and any  
            distribution for qualified disability expenses are required to  
            be disregarded for purposes of determining such eligibility  
            during any period in which the individual maintains, makes  
            contributions to, or receives distributions from an ABLE  
            account, except that in the case of the SSI program-a  
            distribution for housing expenses is not disregarded, and any  
            amount in an ABLE account in excess of $100,000 is considered  
            a resource for the designated beneficiary.


          EXISTING STATE LAW:


          1)Conforms to IRC Section 529 as of the "specified date" of  
            January 1, 2009, with certain state modifications, including a  
            modification to the 10% tax on excess distributions to instead  
            be an additional tax of 2.5% for state purposes.


          2)Provides its own IRC Section 529 Qualified Tuition Program,  
            known as the "Golden State Scholarshare Trust" (ScholarShare).  
             ScholarShare enables taxpayers to save for college by putting  
            money in tax-advantaged investments.  After-tax contributions  
            allow earnings to grow tax-deferred and disbursements, when  
            used for tuition and other qualified expenses, are federal and  
            state tax-free.  Distributions in excess of qualified higher  
            education expenses incurred for the beneficiary, the portion  
            of the excess that is treated as earnings generally is subject  
            to income tax and an additional 2.5% tax for state purposes.


          3)Limits the total amount of contributions to a beneficiary to  








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            $371,000.  Accounts that have reached the limit may continue  
            to accrue earnings.


          FISCAL EFFECT:  The FTB estimates general fund revenue loss of  
          $100,000 in fiscal year (FY) 2015-16, $400,000 in FY 2016-17,  
          and $900,000 in FY 2017-18. 


          COMMENTS:  


           1)Author's Statement  : The author has provided the following  
            statement in support of this bill:


               In California many people with disabilities and their  
               families depend on a variety of public benefits for income,  
               health care, food and housing assistance provided by the  
               state and federal government.  There are strict eligibility  
               requirements for public benefits, such as Supplemental  
               Security Income/State Supplementary Payment (SSI/SSP),  
               CalFresh and Medi-Cal, which often don't allow an  
               individual to have more than $2,000 in savings.  To remain  
               eligible for these public benefits, an individual cannot  
               save for the future. 





               The ABLE Act recognizes the extra and significant costs of  
               living with a disability.  These include costs related to  
               raising a child with significant disabilities or a working  
               age adult with disabilities, for accessible housing and  
               transportation, personal assistance services, assistive  
               technology and health care not covered by insurance,  
               Medicaid or Medicare. 









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               Eligible individuals and families will be allowed to  
               establish ABLE savings accounts that will not affect their  
               eligibility for SSI, Medicaid and other public benefits.   
               The legislation explains further that an ABLE account will,  
               with private savings, "secure funding for  
               disability-related expenses on behalf of designated  
               beneficiaries with disabilities that will supplement, but  
               not supplant, benefits provided through private insurance,  
               Medicaid, SSI, the beneficiary's employment and other  
               sources."  However, pursuant to federal law once an ABLE  
               account reaches $100,000 SSI benefits are suspended until  
               the balance goes below that amount. 





               Specifically, the bill will give eligible Californians with  
               disabilities access to federally recognized 529A ABLE  
               accounts.  Eligibility is federally defined as entitlement  
               to benefits based on blindness or disability under the  
               Federal Social Security Act that occurred before the date  
               on which the individual reached 26 years of age.  The  
               California ABLE program will be administered by the State  
               Treasurer, who also administers 529 college savings  
               accounts. 





               AB 449 will provide people with disabilities and families  
               raising a child with disabilities an opportunity to save  
               money without being penalized with loss of public social  
               services.








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           2)Arguments in Support  :  The Club 21 Learning and Resources  
            Center states that "[a] person with a disability cannot  
            currently have assets worth more than $2,000 or earn more than  
            $680 per month without forfeiting eligibility for critical  
            government programs like Medicaid and Supplemental Security  
            Income (SSI) benefits.  This can have the effect of  
            discouraging people with disabilities from working and  
            saving."  Proponents further state that this bill "will allow  
            people with disabilities to earn money and save without losing  
            access to essential safety net programs, such as Medi-Cal and  
            Social Security.  Money put into ABLE accounts can be used to  
            support education, housing, transportation, employment  
            training, health, personal support services, and other  
            expenses approved under federal regulations to benefit the  
            person with a disability."


           3)What does the ABLE Act do  ?  The ABLE Act allows individual  
            states to establish ABLE programs, under which a blind or  
            disabled person may establish a tax-favored savings account  
            that may accept contributions and make distributions for the  
            individual to pay certain qualifying disability expenses.   
            Assets in an ABLE account, up to a $100,000, are not taken  
            into account when determining eligibility for federal welfare  
            benefit programs.  Furthermore, the structure and tax  
            treatment of the account generally follows the same rules as a  
            529 educational savings account.  In this regard, after-tax  
            contributions are placed in the account, amounts earned in the  
            account are tax-deferred, and distributions are not included  
            in income so long as they are used for qualifying disability  
            expenses.


           4)Substantial Benefits  :  The new ABLE program provides disabled  
            individuals and their families with two primary benefits.   
            First, the program dramatically expands eligibility for  
            federal and state welfare programs by eliminating asset tests  








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            for many of the means-tested welfare programs.  By excluding  
            up to $100,000 in an ABLE account from means-tested federal  
            programs, disabled individuals who may not have qualified for  
            SSI or Medicaid in the past can now receive benefits.  Second,  
            the program provides an alternative, but not necessarily a  
            replacement, to more expensive and more complicated special  
            needs trusts currently being used to shield assets.  


           5)ABLE Accounts are Excluded from Federal and State Means  
            Testing  :  One of the largest benefits afforded by the ABLE Act  
            is the ability to exclude certain assets from federal  
            means-tested programs.  As an example, in order for an  
            individual to obtain SSI, the countable resources must be  
            worth not more than $2,000 for an individual or $3,000 for a  
            couple.  In essence, the ABLE Act has increased countable  
            assets from $2,000 to $100,000 for disabled individuals  
            seeking eligibility for SSI.  


            Unfortunately, this bill's language may not accomplish the  
            same goal with respect to California specific means-tested  
            programs.  IRC Section 103 provides, in part, that any amount  
            in an ABLE account, any contribution to an ABLE account, and  
            any distribution for qualified expenses shall not be  
            considered for federal means-tested programs.  This bill,  
            however, states that "notwithstanding any other law, money in  
            an ABLE account shall not count towards determining  
            eligibility for state or local means-tested programs."  This  
            bill makes no mention of contributions or distributions for  
            qualified expenses.  The plain reading of the statute suggests  
            that only the funds in the account shall be excluded from  
            means testing and nothing else.  The lack of clarity with  
            respect to assets that are excluded from state and local  
            means-tested programs may lead to disabled individuals losing  
            eligibility for certain California welfare programs.  The  
            author may wish to consider clarifying the language in this  
            bill to ensure that contributions and earnings are excluded  
            from state and local means-tests programs. 








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           6)Alternative to Special Needs Trusts  :  If the goal was to  
            merely increase the cap on assets that disabled individuals  
            can hold to qualify for various federal means-tested programs,  
            it would have been easier for the Federal Government to simply  
            increase asset limitations instead of creating 529 accounts  
            that exclude assets from means-tested programs.  It appears  
            that the ABLE act may have also attempted to address the more  
            legally technical and potentially expensive use of  
            Special/Supplemental Needs Trust.  A special needs trust is a  
            specific type of trust that can be created by a parent or  
            guardian to benefit a person with a disability.  The goal of a  
            special needs trust is to allow a person with a disability to  
            benefit from funds placed in the trust while, at the same  
            time, receiving public benefit.  Depending on how the trust is  
            created, different restrictions apply.  


            There are primarily two types of special needs trusts:   
            first-party trusts and third-party trusts.  A first-party  
            trust is a trust that is funded with assets owned by the  
            beneficiary.  Most first-party trusts that hold the  
            beneficiary's assets are considered countable resources for  
            federal means-tested programs.  However, the Medicaid program  
            provides for the creation of certain first-party trust that  
            can be funded with the beneficiary's own assets, which will  
            not be counted towards Medicaid's asset test.  These types of  
                                                                  trusts are "D-4A Special Needs Trusts", named after the  
            federal code section.  These accounts require that some or all  
            of the income remaining be paid to the state equal to the  
            total medical assistance paid to the beneficiary.


            The second category of special needs trust is a third-party  
            trust, which is a trust that is funded by assets of a person  
            other than the beneficiary.  These trusts, if properly  
            drafted, are generally not countable as an asset available to  
            the beneficiary for SSI or Medicaid purposes.  Appropriate  








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            operative language must be used so that the assets are not  
            counted for Medicaid purposes.  Additionally, unlike  
            first-party trusts, the government is not entitled to recover  
            expenses of SSI or Medicaid paid to the beneficiary. 


            The ABLE Act specifically provides that in the event the  
            beneficiary dies, all amounts remaining in the ABLE account  
            not in excess of the amount equal to the medical assistance  
            paid to the beneficiary shall be distributed to the state.   
            Additionally, a contribution to an ABLE account is treated as  
            a completed gift to the beneficiary of the account.  Unlike  
            first-party trusts, ABLE accounts do not require specialized  
            attorneys to ensure that the beneficiary remains eligible for  
            federal benefits.  It appears, therefore, that the ABLE Act  
            provides a less complicated and less expensive way of allowing  
            guardians, parents, and other family members to gift funds to  
            a disabled individual.  However, because ABLE accounts contain  
            a payback provision to the state for medical expenses incurred  
            by the beneficiary, existing trusts may still be necessary  
            depending on individual circumstances.


           7)Earnings and Distributions Excluded from Income  :  The ABLE Act  
            is, in part, modeled after 529 educational savings accounts.   
            The two primary benefits of 529 educational savings accounts  
            is that funds placed in the account grow tax-free and  
            distributions, when made for qualifying educational expenses,  
            are federal and state income tax-free.  The exclusion for  
            earnings and distributions from taxes is the primary incentive  
            for saving in a 529 educational account.  ABLE accounts,  
            although providing similar preferential tax treatment, do not  
            provide similar results.  As noted above, qualifying expenses  
            under the ABLE Act include expenses related to housing,  
            health, transportation, education, and personal support  
            services.  These types of expenses are immediate and ongoing.   
            Unlike a 529 educational account which can allow contributions  
            to grow until the beneficiary is ready to enter college, funds  
            in an ABLE account are needed immediately and are unlikely to  








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            remain in the account long enough to generate the same level  
            of growth.  


           8)How is a tax expenditure different from a direct expenditure  ?   
            As the Department of Finance notes in its annual Tax  
            Expenditure Report, there are several key differences between  
            tax expenditures and direct expenditures.  First, tax  
            expenditures are reviewed less frequently than direct  
            expenditures once they are put in place.  Second, there is  
            generally no control over the amount of revenue losses  
            associated with any given tax expenditure.  Finally, once  
            enacted, it takes a two-thirds vote to rescind an existing tax  
            expenditure absent a sunset date.  The two-thirds vote  
            requirement can be especially problematic if the Federal  
            Government makes future modifications to the ABLE Act that  
            result in a tax increase.  The two-thirds vote requirement may  
            make future conformity much more difficult.  For this reason,  
            the author may wish to include a five-year sunset date for the  
            exclusions to provide the opportunity for future legislative  
            review.


           9)10% Tax for Distributions Included in Income  :  As noted in the  
            FTB analysis, "[t]his bill would provide that the portion of  
            any distribution that is includible in state income would be  
            subject to an additional 10-percent tax for state purposes (in  
            addition to the 10-percent additional tax imposed for federal  
            purposes), unless the distribution is made after the death of  
            the beneficiary."  California generally imposes a lower tax  
            rate than that of the Federal Government; for example,  
            California generally modifies the 10% tax on nonqualified  
            pension distributions to be a 2.5% additional tax for state  
            purposes.  In order to be consistent with other provisions of  
            existing law, the Committee may wish to reduce the tax imposed  
            in this bill for distributions that are included in income to  
            2.5%.










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           10)Related Legislation  :  SB 324 (Pavley) is substantially  
            similar to this bill, except that it does not exclude money in  
            an ABLE account from being counted for state or local  
            means-tested programs.  SB 324 is pending hearing by the  
            Senate Governance and Finance Committee.

          REGISTERED SUPPORT / OPPOSITION:




          Support


          California Disability Services Association (Co-Sponsor)


          Association of Regional Center Agencies


          California Association of Health Services at Home


          California Association of Public Authorities


          Cal Tash


          California Taxpayers Association


          Club 21 Learning and Resources Center


          National Down Syndrome Society


          United Domestic Workers of America








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          Opposition


          None on file




          Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916)  
          319-2098