BILL ANALYSIS                                                                                                                                                                                                    

                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

          |Bill No:  |AB 449                           |Hearing    | 6/24/15 |
          |          |                                 |Date:      |         |
          |Author:   |Irwin                            |Tax Levy:  |No       |
          |Version:  |5/5/15                           |Fiscal:    |Yes      |
          |Consultant|Grinnell                                              |
          |:         |                                                      |


          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  


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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  

           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.  



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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  

          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  

          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  

                 "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  

                   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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