BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 324 |Hearing |4/8/15 |
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|Author: |Pavley |Tax Levy: |No |
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|Version: |2/23/15 |Fiscal: |Yes |
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|Consultant|Grinnell |
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ACHIEVING A BETTER LIFE EXPERIENCE (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
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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. SB 324 implements the ABLE Act in California, and
directs the State Treasurer to administer ABLE accounts on
behalf of qualified Californians.
Proposed Law
Senate Bill 324 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. The
measure also defines its terms, and allows the Treasurer to
issue regulations necessary to implement the measure.
State Revenue Impact
According to the Franchise Tax Board, SB 324 results in revenue
losses of $100,000 in 2015-16, $400,000 in 2016-17, and $900,000
in 2017-18.
Comments
1. Purpose of the bill . According to the author, "SB 324
establishes an ABLE Act program, within the State Treasurer's
office, that will provide financial tools for individuals with
disabilities. The measure also ensures that these ABLE savings
accounts are tax free. This new program will ensure that
individuals with developmental disabilities and their families
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will be able to save without fear of losing eligibility for
public assistance programs."
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
a total of $14,000 per year, and allowing only one account per
individual.
3. Who and what ? SB 324 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 SB 324'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 SB 324 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
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monitoring; and funeral and burial services.
4. Unintended Consequences . When enacting the ABLE Act,
Congress deemed that contributions, earning, and distributions
from ABLE accounts below $100k don't count towards means-tested
welfare assistance programs for disabled individuals. While
California's regional center disabled services aren't based on
income, Medi-Cal does use means testing. To ensure that
individuals who normally qualify for Medi-Cal aren't
accidentally disenrolled because ABLE account balances push them
above asset or income limits, the Committee may wish to consider
amending SB 324 to provide that ABLE account amounts under
$100,000 do not affect the individual's Medi-Cal eligibility.
5. Rubber and road . SB 324 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, specifying
the contents of trust agreements, 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 SB 324's
implementation may be helpful.
6. 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).
7. Technicals . The ABLE Act imposes a 10% tax on distributions
that exceed the beneficiary's qualified expenses; however, the
state generally applies penalties for state purposes equal to
one-quarter of federal ones because federal tax liabilities are
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generally four times state ones. The Committee may wish to
consider amending SB 324 to reduce this excise tax from 10% to
2.5%, in addition to fixing erroneous cross references.
Support and
Opposition (4/2/15)
Support : Association of Regional Center Agencies, Autism
Speaks, California Association for Health Services at Home,
Center for Autism and Related Disorders, National Down Syndrome
Society, The Arc and United Cerebral Palsy California
Collaboration; United Cerebral Palsy.
Opposition : Unknown.
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