BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 449 |Hearing | 6/24/15 |
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|Author: |Irwin |Tax Levy: |No |
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|Version: |5/5/15 |Fiscal: |Yes |
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|Consultant|Grinnell |
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INCOME TAXATION: SAVINGS PLANS: QUALIFIED ABLE PROGRAM
Establishes ABLE Accounts in California, administered by the
State Treasurer.
Background and Existing Law
California law does not automatically conform to changes to
federal tax law, except for specific retirement provisions.
Instead, the Legislature must affirmatively conform to federal
changes. Conformity legislation is introduced either as
individual tax bills to conform to specific federal changes,
like the Mortgage Debt Forgiveness Relief Act (AB 1393, Perea,
2014), or as one omnibus bill that provides that state law
conforms to federal law as of a specified date, currently
January 1, 2009 (SB 401, Wolk, 2010).
On December 19, 2014, President Obama signed the Stephen Beck,
Jr., Achieving a Better Life Experience Act of 2014 (ABLE),
which allows individuals who became blind or disabled before
reaching age 26 to create tax-free savings accounts. ABLE
accounts generally follow the same rules as educations savings
accounts allowed by Section 529 of the Internal Revenue Code
(529s): individuals can make nondeductible cash contributions to
an ABLE account in the name of a specified beneficiary, and
earnings can grow tax free. ABLE account distributions are also
not included in the beneficiary's income so long as they're used
AB 449 (Irwin) 5/5/15 Page 2
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for qualified services for the beneficiary, and distributions
don't exceed the cost of the qualified services. The ABLE Act
imposes a 10% excise tax on distributions that exceed those
costs. Congress created ABLE accounts to offer an alternative
to Special Needs and Supplement Needs Trusts.
The ABLE Act directed states to establish one ABLE account for
each beneficiary who is a resident of the state. The ABLE Act
additionally directed the Internal Revenue Service (IRS) to
issue regulations by June 19th, 2015, to implement the program
to guide states as they enact legislation creating ABLE
accounts. AB 449 implements the ABLE Act in California, and
directs the State Treasurer to administer ABLE accounts on
behalf of qualified Californians.
Proposed Law
Assembly Bill 449 enacts ABLE accounts in California based on
the ABLE Act's definitions, and directs the State Treasurer to
administer the program in compliance with federal law. As such,
neither federal nor state taxes will apply to ABLE Account
earnings or distributions used for qualified services.
Additionally, the measure provides that any moneys in an ABLE
account, contributions to, and distributions for qualified
disability services from, that don't exceed $100,000 don't count
toward determining eligibility for any state or local
means-tested program.
The measure also defines its terms, makes legislative findings
and declarations supporting its purposes, and allows the
Treasurer to issue regulations necessary to implement the
measure.
State Revenue Impact
According to the Franchise Tax Board, AB 449 results in revenue
losses of $100,000 in 2015-16, $400,000 in 2016-17, and $900,000
in 2017-18.
Comments
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1. Purpose of the bill . According to the author, "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. AB 449 will give
eligible Californians with disabilities access to federally
recognized 529A ABLE accounts. The California ABLE program will
be administered by the State Treasurer, who also administers 529
college savings accounts. 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. However, pursuant to federal law once an ABLE account
reaches $100,000 SSI benefits are suspended until the balance
goes below that amount. 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. 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. Not the same . Congress created ABLE accounts to largely
resemble education savings accounts authorized by Section 529 of
the Internal Revenue Code, so much so that they did so by
creating new Section 529A just for them. However, the
differences between the two are important. Education accounts
have been criticized as tax shelters for wealthy individuals to
fund education expenses for their children, with only 10% of
account holders having less than $50,000 in annual income, and
more than 70% with more than $150,000. While federal law
doesn't set explicit contribution limits for 529s, the federal
gift can apply, but is generally avoided by establishing
multiple accounts for the same beneficiary. In response to
these criticisms, President Obama briefly proposed to tax 529
earnings as ordinary income before withdrawing the proposal.
ABLE accounts avoid these critiques by limiting contributions to
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a total of $14,000 per year, and allowing only one account per
individual.
3. Who and what ? AB 449 erects the necessary infrastructure for
ABLE accounts in California, intended to help only "qualified
individuals" pay for select "qualified services." These terms'
definitions determine which individuals and services are
eligible for AB 449's tax benefits, so they must be crafted
broadly enough to apply to individuals and services the
Legislature wants to include, without including anyone who
shouldn't be entitled. While AB 449 relies exclusively on
federal definitions from the ABLE Act to ensure conformity
between state and federal taxes, what do these terms mean
specifically?
"Qualified individual" is an individual who is blind or
disabled, with onset before the age of 26. The individual
must be entitled to Social Security Disability Insurance
benefits, or have a disability certificate on file with the
Internal Revenue Service.
"Qualified services" 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; oversight and
monitoring; and funeral and burial services.
4. Rubber and road . AB 449 selects the State Treasurer's
Office to create ABLE accounts for designated beneficiaries,
similar to its 529 program, called "ScholarShare." ScholarShare
is governed by a legislatively-enacted investment board
comprised of the State Treasurer, the Director of Finance, the
executive director of the State Board of Education, plus
Governor, Senate, and Assembly appointees (AB 530, Committee on
Higher Education, 1997). AB 530 enacted several sections in the
Education Code enacting a board, granting it powers, and
generally guiding the Treasurer's implementation of
ScholarShare. While the scope of the ABLE Act will likely be
significantly smaller, further statutory direction to the
Treasurer regarding AB 449's implementation may be helpful, such
as:
Creating a board composed of the State Treasurer,
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State Controller, Director of Finance, Executive Director
of the California Department of Developmental Services,
and the Chair of the State Council on Developmental
Disablities, or their designees.
Stating that the start-up and first-year
administrative costs for implementing ABLE accounts must
be appropriated from the General Fund in the State Budget
Act, but requiring the board to repay these costs within
five years, and
Create the ABLE Act trust fund, and divide amounts it
receives into an administrative fund and a program fund.
Provide that the program fund be continuously
appropriated, but require the Legislature to appropriate
the administrative fund.
5. Deduct this ? ABLE accounts generate tax-free earnings.
Distributions used to pay for qualified services are also not
taxable; however, individuals donating to the accounts can't
deduct contributions from income for federal or state taxes.
While the state could allow for such a deduction, doing so would
result in a revenue loss to the state, and a lack of conformity
with federal law. Additionally, previous bills that enact a
deduction for 529 contributions haven't reached the Governor's
Desk (SB 643, Florez, 2007; AB 675, Gilmore, 2008; and AB 819,
Runner, 2009).
6. Related legislation . On April 8th of this year, the
Committee approved SB 324 (Pavley), which is nearly identical to
the bill. The Senate subsequently approved the measure
unanimously, and it's being held at the Assembly Desk. However,
the measures differ in four respects as a result of amendments
adopted by the Assembly Committee on Revenue and Taxation:
AB 449 sunsets beginning in the 2021 taxable year, while
SB 324 doesn't have a sunset provision.
AB 449 directs the Treasurer to issue regulations
generally to implement the bill, and specifically to track
all ABLE accounts in California, while SB 324 only contains
the general regulation authority.
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The two measures express the disabled program
eligibility threshold exception for ABLE accounts slightly
differently. AB 449 provides that any moneys in an ABLE
account, contributions to, and distributions for qualified
disability services from, that don't exceed $100,000 don't
count toward determining eligibility for any state or local
means-tested program. SB 324 states that moneys in ABLE
accounts that don't exceed $100,000 don't count against the
individual's Medi-Cal eligibility.
AB 449 contains a legislative intent section regarding
furthering the ABLE Act, while
SB 324 does not.
7. Technicals . AB 449 contains a sunset provision, which
unfortunately causes unavoidable problems for ABLE accounts in
California. Not only would distributions for qualified services
for ABLE accountholders become taxable for state purposes, but
for federal too if the Legislature doesn't extend the sunset,
because federal law requires a state to administer accounts to
realize federal tax benefits. A sunset clause revokes the
Treasurer's authority to administer the accounts. The Committee
may wish to consider deleting the measure's sunset clause.
Assembly Actions
Assembly Floor 79-0
Assembly Appropriations 17-0
Assembly Revenue and Taxation 9-0
Support and
Opposition (6/16/15)
Support : State Treasurer John Chiang, The Alliance Supporting
People with Intellectual and Developmental Disabilities, The Arc
of Ventura County, The Arc and United Cerebral Palsy California
Collaboration, Association of California Regional Center
Agencies, Autism Speaks, Cal-TASH, California Association for
Health Services at Home, California Association of Public
Authorities, California Disability Services Association,
California State Council on Developmental Disabilities,
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California Taxpayers Association, Center for Autism and Related
Disorders, Club 21 Learning and Resource Center, Disability
Rights California, Down Syndrome Association of Central
California, Down Syndrome Association of Los Angeles, Down
Syndrome Society of Orange County, National Down Syndrome
Association, Special Heroes (San Diego Down Syndrome),
Strategies to Empower People, United Domestic Workers AFSCME
Local 3930.
Opposition : Unknown.
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