BILL ANALYSIS Ó
SB 324
Page 1
Date of Hearing: July 13, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
SB
324 (Pavley) - As Amended April 15, 2015
Majority vote. Fiscal committee.
SENATE VOTE: 40-0
SUBJECT: Income taxation: savings plans: Qualified ABLE
Program
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
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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 State Treasurer 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 all 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)Provides that, notwithstanding any other law, moneys in an
ABLE account, not to exceed $100,000, shall not count towards
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determining eligibility for the Medi-Cal program.
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.
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.
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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 may adopt regulations to
implement this program.
EXISTING FEDERAL LAW:
1)Provides tax-exempt status to qualified tuition programs
(QTP). Qualified tuition programs are programs established
and maintained by a state (or by an eligible education
institution) under which a person may purchase tuition credit
or make cash contributions to meet the qualified higher
education expenses of a designated beneficiary. Contributions
to a QTP cannot exceed the amount necessary to provide for the
beneficiary's qualified higher education expenses.
Distributions to a beneficiary are excluded from income.
However, contributions made to a QTP are not deductible.
2)Provides a qualified ABLE program under the ABLE Act of 2014
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for taxable years beginning on or after January 1, 2015. A
qualified ABLE program is a program established and maintained
by a state, or agency or instrumentality of the state. A
qualified ABLE program is generally exempt from income tax,
but is otherwise subject to the taxes imposed on the unrelated
business income of tax-exempt organizations. A qualified ABLE
program must meet the following conditions:
a) Under the provisions of the program, contributions may
be made to an ABLE account, established for the purpose of
meeting the qualified disability expenses of the designated
beneficiary of the account;
b) The program must limit a designated beneficiary to one
ABLE account;
c) The program must allow for the establishment of ABLE
accounts only for a designated beneficiary who is either a
resident of the state maintaining such ABLE program or a
resident of a state that has not established an ABLE
program which has entered into a contract with such state
to provide the contracting state's residents with access to
the state's ABLE program; and,
d) The program must meet other specified requirements.
3)Provides that contributions to an ABLE account must be made in
cash and are not deductible for federal income tax purposes.
Except in the case of a rollover contribution from another
account, an ABLE account must provide that it may not receive
aggregate contributions during a taxable year in excess of the
annual gift tax exclusion amount. For 2015, the annual gift
tax exclusion amount is $14,000. Additionally, a qualified
ABLE program must provide adequate safeguards to ensure that
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ABLE account contributions do not exceed the limit imposed on
accounts under the qualified tuition program of the state
maintaining the qualified ABLE program. Amounts in the
account accumulate on a tax-deferred basis (i.e., income on
accounts in the plan is not subject to current income tax).
4)Provides that distributions from an ABLE account are
excludable from income to the extent that the total
distribution does not exceed the qualified disability expenses
of the beneficiary during the taxable year. If a distribution
from an ABLE account exceeds the qualified disability expenses
of the beneficiary, a pro-rata portion of the distribution is
excludable from income. The portion of any distribution that
is includible in income is subject to an additional 10 percent
tax unless the distribution is made after the death of the
beneficiary. Amounts in an ABLE account may be rolled over
without income tax liability to another ABLE account for the
same beneficiary or another ABLE account for the designated
beneficiary's brother, sister, stepbrother or stepsister who
is also an eligible individual.
5)Provides that a contribution to an ABLE account is treated as
a completed gift of a present interest to the beneficiary of
the account. Such contributions qualify for the per-donee
annual gift tax exclusion ($14,000 for 2015) and, to the
extent of such exclusion, are exempt from the
generation-skipping transfer (GST) tax. A distribution from
an ABLE account generally is not subject to gift tax or GST
tax.
6)Defines an "eligible individual" as either:
a) An individual for whom a disability certification has
been filed with the Secretary for the taxable year; or,
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b) An individual who has been determined, for purposes of
Social Security Disability Insurance benefits or
Supplemental Security Income (SSI) benefits to meet the
requirements relating to disability or blindness under the
SSI program. In general, an individual must be either
blind or disabled, and the blindness or disability must
have occurred before the date on which the individual
attained age 26.
7)Provides that earning on distributions from an ABLE account
are only untaxed to the extent total distributions do not
exceed the qualified disability expenses of the designated
beneficiary. For these purposes, qualified disability
expenses are any expenses related to the eligible individual's
blindness or disability which are made for the benefit of the
designated beneficiary. Such expenses include the following:
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 under
regulations and consistent with the purposes of this
provision.
8)Provides that each officer or employee having control of the
qualified ABLE program (or their designees) is required to
make reports to the Secretary and to the designated
beneficiaries of ABLE accounts. Such reports must provide
information with respect to contributions, distributions, the
return of excess contributions, and other matters as required
by the Secretary. In addition, for research purposes, such
officers and employees shall make available to the public and
provide to the Secretary, reports containing aggregate
information, by diagnosis and other relevant characteristics,
on contributions and distributions.
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9)Provides, notwithstanding any other provision of federal law
that requires the consideration of one or more financial
circumstances of an individual, for the purpose of determining
eligibility to receive, or the amount of, any assistance or
benefit authorized by such provision to be provided to or for
the benefit of such individual, any amount (including
earnings) in an ABLE account of the individual, any
contributions to an ABLE account of the individual, and any
distribution for qualified disability expenses are required to
be disregarded for purposes of determining such eligibility
during any period in which the individual maintains, makes
contributions to, or receives distributions from an ABLE
account, except that in the case of the SSI program-a
distribution for housing expenses is not disregarded, and any
amount in an ABLE account in excess of $100,000 is considered
a resource for the designated beneficiary.
EXISTING STATE LAW:
1)Conforms to IRC Section 529 as of the "specified date" of
January 1, 2009, with certain state modifications, including a
modification to the 10% tax on excess distributions to instead
be an additional tax of 2.5% for state purposes.
2)Provides its own IRC Section 529 Qualified Tuition Program,
known as the "Golden State Scholarshare Trust" (ScholarShare).
ScholarShare enables taxpayers to save for college by putting
money in tax-advantaged investments. After-tax contributions
allow earnings to grow tax-deferred and disbursements, when
used for tuition and other qualified expenses, are federal and
state tax-free. Distributions in excess of qualified higher
education expenses incurred for the beneficiary, the portion
of the excess that is treated as earnings generally is subject
to income tax and an additional 2.5% tax for state purposes.
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3)Limits the total amount of contributions to a beneficiary to
$371,000. Accounts that have reached the limit may continue
to accrue earnings.
FISCAL EFFECT: The FTB estimates general fund revenue loss of
$100,000 in fiscal year (FY) 2015-16, $400,000 in FY 2016-17,
and $900,000 in FY 2017-18.
COMMENTS:
1)Author's Statement : The author has provided the following
statement in support of this bill:
In the United States, there are multiple financial tools for
individuals to be able to save for future expenses (e.g. college
savings accounts, health savings accounts, and individual
retirement accounts).
However, millions of individuals with disabilities and their
families are unable to use these accounts. Currently,
individuals with disabilities may only have less than $2,000 in
assets in order to have access to critical support programs such
as SSI, SNAP, or Medicaid.
Thus, in order to be able to access these programs, individuals
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with disabilities must remain poor, and cannot plan and save for
large future expenses.
In December 2014, President Obama signed the Achieving a Better
Life Experience (ABLE) Act into law. The California Legislature
had previously urged Congress to pass federal legislation
establishing these savings accounts in 2010 (SJR 31, Pavley) and
2012 (SJR 18, Pavley).
The federal ABLE Act creates tax-free savings accounts for
individuals with disabilities and their families. These accounts
will be able to fund a variety of needed expenses such as
medical and dental care, housing, and education. The act also
authorized each state to create ABLE programs to provide these
savings accounts.
SB 324 will allow people with disabilities to achieve a
better life experience in California by establishing an
ABLE program within the State Treasurer's office.
2)Arguments in Support : According to the California Association
for Health Services at Home (CAHSAH), "Congress passed the
ABLE Act to provide a tax-free savings account for qualified
persons with disabilities, similar to a Health Savings Account
and 529 College Plans. The ABLE Act aims to ease financial
constraints faced by persons with disabilities by making
tax-free savings accounts available to cover qualified
expenses. The Act will also allow for supplemental benefits
in addition to what is provided through private insurance,
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Medi-Cal, or SSI."
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
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
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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.
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
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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
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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.
8)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.
9)10% 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
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%.
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10)Conforming to AB 449 (Irwin) : The author has expressed a
desire to conform this bill to the recent changes made to AB
449 (currently pending hearing by the Senate Appropriations
Committee), which would, in general, create a seven-person
board and an administrative funding source to implement the
provisions of this bill. Incorporating those changes would
add the following provisions to this bill:
a) Creates an ABLE Act Board that consists of the
Treasurer, the Director of Finance, the State Controller,
the Director of Development Services, the chairperson of
the State Council of Developmental Services, the director
of Department of Rehabilitation, or their designees, as
well as a designee from the California State Independent
Living Council;
b) Requires that the ABLE Fund accept money from all ABLE
accounts;
c) Requires the ABLE Act Board to segregate moneys received
by the ABLE Fund into two accounts, which shall be
identified as the program account and the administrative
account;
d) Provides that notwithstanding Government Code Section
13340, the program account and the administrative account
shall be continuously appropriated to the ABLE Act Board
for the purposes of the ABLE Act and for the administration
of the ABLE Act. The administrative costs shall not exceed
one percent of the incoming funds for the fiscal year; and,
e) Provides that an appropriation from the General Fund
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shall be made in the annual Budget Act to fund startup and
first-year costs. The board shall repay, within five
years, the amount appropriated, plus interest calculated at
the rate earned by the Pooled Money Investment Account.
REGISTERED SUPPORT / OPPOSITION:
Support
Board of Governors of the California Community Colleges
California Association for Health Services at Home
California Foundation for Independent Living Centers
California Taxpayers Association
North Los Angeles County Regional Center
State of California, Treasurer
State Council on Developmental Disabilities
Opposition
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None on File
Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916)
319-2098