BILL ANALYSIS Ó
AB 449
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB
449 (Irwin)
As Amended September 3, 2015
Majority vote
--------------------------------------------------------------------
|ASSEMBLY: |79-0 |(June 2, 2015) |SENATE: |39-0 |(September 8, |
| | | | | |2015) |
| | | | | | |
| | | | | | |
--------------------------------------------------------------------
Original Committee Reference: REV. & TAX.
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.
The Senate amendments:
1)Delete the conformity provision to Internal Revenue Code (IRC)
Section 529A, under the Personal Income Tax (PIT) Law.
AB 449
Page 2
2)Delete the sunset provision.
3)Reduce the penalty for unqualified distributions from 10% to
2.5% for state purposes.
4)Delete all definitions.
5)Create the California ABLE Program Trust.
6)Delete the provision allowing a person to make contributions
to an ABLE account that is established for the purpose of
meeting the qualified disability expenses of the designated
beneficiary of the account.
7)Provide that the purposes, powers, and duties of the
California ABLE Program Trust are vested in, and shall be
exercised by the ABLE board. The ABLE board shall have the
power and authority to do all of the following:
a) Sue and be sued;
AB 449
Page 3
b) Make and enter into contracts necessary for the
administration of the ABLE program trust, and engage
personnel, including consultants, actuaries, managers,
counsel, and authors, as necessary for the purpose of
rendering professional, managerial, and technical
assistance, and advice;
c) Adopt a corporate seal;
d) Cause moneys in the program fund to be held and invested
and reinvested;
e) Accept any grants, gifts, appropriations, and other
moneys from any unit of federal, state, or local government
or any other person, firm, partnership, or corporation for
deposit to the administrative fund or the program fund;
f) Enter into agreements with designated beneficiaries or
eligible individuals to establish and maintain an ABLE
account;
g) Make provisions for the payment of costs of
administration and operation of the ABLE program;
AB 449
Page 4
h) Carry out duties and obligations of the ABLE program
trust;
i) Conduct studies and projects in order to advise
designated beneficiaries or eligible individuals;
j) Promulgate, impose, and collect administrative fees;
aa) Set minimum and maximum investment levels;
bb) Administer the funds of the ABLE program trust;
cc) Procure insurance against any loss; and,
dd) Procure insurance indemnifying any member of the ABLE
board from persona loss or liability resulting from a
member's action or inaction as a member of the ABLE board.
8)Allow the Treasurer to appoint an executive director and
AB 449
Page 5
determine the duties of the executive director.
9)Require the ABLE board to segregate moneys received by the
ABLE program trust into two funds, which shall be identified
as the program fund and the administrative fund.
10)Require the program fund to be continuously appropriated,
without regard to fiscal years, to the ABLE Act Board.
11)Require moneys in the administrative fund to be available for
the ABLE Act Board. The administrative costs shall not exceed
3% of the incoming funds for each fiscal year for the first
five fiscal years following the opening of the first ABLE Act
account. After the five-year period, administrative costs
shall not exceed 1% of the incoming funds for each fiscal
year.
12)Require that the funding for startup and administrative costs
be provided in the form of a loan from the General Fund
sufficient to cover the ABLE board's projected administrative
costs for its first two years of implementing the program.
Once the loan has been expended and revenues from the program
are sufficient to cover the ABLE board's ongoing costs, the
ABLE board shall repay, within five years, the amount loaned,
plus interest calculated at the rate earned by the Pooled
Money Investment Account.
AB 449
Page 6
13)Require, no later than 30 days after the close of each month,
the investment manager to place on file for public inspection
during business hours a report with respect to investment
performance. The investment manager shall report the
following information, to the extent applicable, to the ABLE
board within 30 days following the end of each month:
a) The type of investment, name of the issuer, date of
maturity, and the par and dollar amount invested in each
security, investment, and money within the program fund;
b) The weighted average maturity of the investments within
the program fund;
c) Any amounts in the program fund that are under the
management of an investment manager;
d) The market value as of the date of the report and the
source of this valuation for any security within the
program fund; and,
e) A description of the compliance with the statement of
investment policy.
AB 449
Page 7
14)Allow the moneys in the program fund to be invested by the
Treasurer or be invested under contract with an investment
manager, as determined by the ABLE board.
15)Require the ABLE board to annually prepare and adopt a
written statement of investment policy.
16)Allow for the transfer of funds from the program fund to the
administrative fund for the purpose of paying operating costs
associated with administering the ABLE program trust.
17)Require all funds paid by designated beneficiaries or
eligible individuals in connection with ABLE accounts to be
deposited into the program fund, and be promptly invested and
accounted for separately.
18)Require the ABLE board to maintain separate accounting for
each designated beneficiary.
19)Allow any designated beneficiary to direct the investment of
any contributions to his or her ABLE account, or any earnings,
no more than two times in any calendar year.
20)Require that the assets of the trust be preserved, invested,
AB 449
Page 8
and expended solely for the purposes of the trust and must be
held in trust for the designated beneficiaries. The assets
shall not be transferred or used by the state for any purposes
other than the purposes of the trust and consistent with the
provisions of the federal ABLE Act.
21)Replace the Treasurer with the ABLE board for purposes of
adopting regulations.
22)Require the ABLE board to market the ABLE program to
California residents.
23)Provide that this bill shall only become effective if SB 324
(Pavley) is enacted.
AS PASSED BY THE ASSEMBLY, this bill:
1)Conformed, with specified modifications, the PIT Law and the
Corporations Tax (CT) Law to the IRC Section 529A, relating to
qualified ABLE programs.
2)Provided 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)Established a qualified ABLE program and the qualified ABLE
AB 449
Page 9
fund for purposes of implementing the federal ABLE Act
pursuant to IRC Section 529A.
4)Provided 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)Allowed 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)Provided 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)Defined 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)Defined an "ABLE fund" or a "fund" as a fund established for
purposes of implementing the federal ABLE Act.
9)Defined an "eligible individual" as an individual who is
AB 449
Page 10
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)Defined a "designated beneficiary" as the eligible individual
who established an ABLE account and is the owner of the
account.
11)Defined the "federal ABLE Act" as the federal Stephen Beck
Jr., Achieving a Better Life Experience Act of 2014.
12)Defined a "qualified ABLE program" or a "program" as a
program established to implement the federal ABLE act pursuant
to IRC Section 529A.
13)Defined "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.
AB 449
Page 11
14)Provided that the Treasurer shall adopt regulations to track
all ABLE accounts in California and may adopt further
regulations to implement this program.
15)Provided 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 Senate Appropriations
Committee:
1)The Franchise Tax Board (FTB) indicates that this bill would
result in a General Fund revenue loss of $100,000 in 2015-16,
$400,000 in 2016-17, and $900,000 in 2017-18. FTB would incur
minor costs to implement its provisions of the bill.
2)The State Treasurer's Office (STO), the entity that would
administer ABLE accounts on behalf of qualified Californians,
would incur annual costs of $330,000 (General Fund).
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
AB 449
Page 12
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.
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
AB 449
Page 13
families raising a child with disabilities an
opportunity to save money without being penalized with
loss of public social services.
2)Splitting the ABLE Program: Both this bill and SB 324
(Pavley) contained identical language establishing the
California ABLE Program. The authors have agreed to split the
provisions of the bill. The current version of this bill
reflects the other half of SB 324 (Pavley).
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
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
AB 449
Page 14
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.
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.
AB 449
Page 15
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.
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
AB 449
Page 16
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.
Analysis Prepared by:
Carlos Anguiano / REV. & TAX. / (916) 319-2098
FN:
0002231