BILL ANALYSIS Ó
AB 449
Page 1
ASSEMBLY THIRD READING
AB
449 (Irwin)
As Amended May 5, 2015
Majority vote
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|Committee |Votes |Ayes |Noes |
| | | | |
| | | | |
|----------------+------+--------------------+----------------------|
|Revenue & |9-0 |Ting, Brough, | |
|Taxation | |Dababneh, Gipson, | |
| | |Roger Hernández, | |
| | |Mullin, Patterson, | |
| | |Quirk, Wagner | |
| | | | |
|----------------+------+--------------------+----------------------|
|Appropriations |17-0 |Gomez, Bigelow, | |
| | |Bonta, Calderon, | |
| | |Chang, Daly, | |
| | |Eggman, Gallagher, | |
| | | | |
| | | | |
| | |Eduardo Garcia, | |
| | |Gordon, Holden, | |
| | |Jones, Quirk, | |
| | |Rendon, Wagner, | |
| | |Weber, Wood | |
| | | | |
| | | | |
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AB 449
Page 2
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.
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 Secretary 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
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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,
contributions to, and any distribution for qualified disability
expenses from an ABLE account, not to exceed $100,000, 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 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.
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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.
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.
15)Provides that this chapter shall remain in effect only until
January 1, 2022, and as of that date is repealed unless a later
enacted statute that is enacted before January 1, 2022, deletes
or extends that date.
FISCAL EFFECT: According to the Assembly Appropriations
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Committee:
1)Administrative costs of approximately $330,000 to the Treasurer
to administer the program; potentially significant
administrative costs to the Franchise Tax Board.
2)Estimated General Fund revenue decreases of approximately
$900,000 per fiscal year once the program becomes fully
implemented.
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
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housing and transportation, personal assistance
services, assistive technology and health care not
covered by insurance, Medicaid or Medicare.
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.
2)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
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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.
3)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 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.
4)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
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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.
5)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
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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 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.
6)Earnings and Distributions Excluded from Income: The ABLE Act
is, in part, modeled after 529 educational savings accounts.
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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 remain in the
account long enough to generate the same level of growth.
7)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.
8)Ten percent 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
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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%.
9)Related Legislation: SB 324 (Pavley) of the current legislative
session, 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.
Analysis Prepared by:
Carlos Anguiano / REV. & TAX. / (916) 319-2098
FN: 0000663