BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     SB 324


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          SENATE THIRD READING


          SB  
          324 (Pavley)


          As Amended  August 17, 2015


          Majority vote


          SENATE VOTE:  40-0


           ------------------------------------------------------------------ 
          |Committee       |Votes|Ayes                  |Noes                |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |----------------+-----+----------------------+--------------------|
          |Revenue &       |9-0  |Ting, Brough,         |                    |
          |Taxation        |     |Dababneh, Gipson,     |                    |
          |                |     |Roger Hernández,      |                    |
          |                |     |Mullin, Patterson,    |                    |
          |                |     |Quirk, Wagner         |                    |
          |                |     |                      |                    |
          |----------------+-----+----------------------+--------------------|
          |Appropriations  |17-0 |Gomez, Bigelow,       |                    |
          |                |     |Bloom, Bonta,         |                    |
          |                |     |Calderon, Chang,      |                    |
          |                |     |Nazarian, Eggman,     |                    |
          |                |     |Gallagher, Eduardo    |                    |
          |                |     |Garcia, Holden,       |                    |
          |                |     |Jones, Quirk, Rendon, |                    |
          |                |     |Wagner, Weber, Wood   |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |








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          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  
            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)Creates an instrumentality of the State of California to be  
            known as the California ABLE Program Trust.  The purposes,  
            powers, and duties of the California ABLE Program Trust are  
            vested in, and shall be exercised by, the California ABLE Act  
            Board.


          4)Creates the California ABLE Act Board (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 Disabilities, the Director of  
            Rehabilitation, and the Chair of the State Independent Living  
            Council, or their designees.  The Treasurer shall serve as  
            chair of the board.


          5)Provides that the board shall have the power and authority to  
            do all of the following:








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             a)   Sue and be sued;


             b)   Make and enter into contracts necessary for the  
               administration of the ABLE program trust, and engage  
               personnel, including consultant, actuaries, managers,  
               counsel, and auditors, as necessary for the purpose of  
               rendering professional, managerial, and technical  
               assistance and advice;


             c)   Adopt a corporate seal and change and amend it from time  
               to time;


             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.   
               The board may not accept any contribution by any nonpublic  
               entity, person, firm, partnership, or corporation that is  
               not designated for a specified designated beneficiary;


             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 trust;










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             h)   Carry out the duties and obligations of the ABLE program  
               trust pursuant to this chapter and the federal ABLE Act  
               pursuant to IRC Section 529A and federal regulations issued  
               pursuant to that code, and have any other powers as may be  
               reasonably necessary for the effectuation of the purposes,  
               objectives, and provisions of this chapter;


             i)   Carry out studies and projections in order to advise  
               designated beneficiaries or eligible individuals regarding  
               present and estimated future qualified disability expenses  
               and the levels of financial participation in the ABLE  
               program trust required in order to assist designated  
               beneficiaries or eligible individuals;


             j)   Participate in any other way in any federal, state, or  
               local governmental program for the benefit of the ABLE  
               program trust;


             aa)  Promulgate, impose, and collect administrative fees and  
               charges in connection with transactions of the ABLE program  
               trust, and provide for reasonable service charges,  
               including penalties for cancellations;


             bb)  Set minimum and maximum investment levels;


             cc)  Administer the funds of the ABLE program trust;


             dd)  Procure insurance against any loss in connection with  
               the property, assets, or activities of the ABLE program  
               trust; and,


             ee)  Procure insurance indemnifying any member of the board  








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               from personal loss or liability resulting from a member's  
               action or inaction as a member of the board.


          6)Requires the Treasurer to appoint an executive director, who  
            shall not be a member of the board and who shall serve at the  
            pleasure of the board.  


          7)Requires the Treasurer to determine the duties of the  
            executive director and other staff as necessary and set his or  
            her compensation.


          8)Allows the board to authorize the executive director to enter  
            into contracts on behalf of the board or conduct any business  
            necessary for the efficient operation of the board


          9)Requires the board to segregate moneys received by the ABLE  
            program trust into two accounts, which shall be identified as  
            the program fund and the administrative fund. 


          10)Provides that notwithstanding Government Code Section 13340,  
            the program fund and the administrative fund 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 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.


          11)Provides that funding for startup and administrative costs  
            for the board shall be provided in the form of a loan from the  
            General Fund sufficient to cover the board's projected  
            administrative costs for its first two years of implementing  








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            the program.  Once the loan has been expended and revenues  
            from the program are sufficient to cover the board's ongoing  
            costs, the board shall repay, within five years, the amount  
            loaned, plus interest calculated at the rate earned by the  
            Pooled Money Investment Account.


          12)Requires, no later than 30 days after the close of each  
            month, the investment manager to make available a report with  
            respect to investment performance.  The investment manager  
            shall report the following information to the 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;


          13)Provides that moneys in the program fund may be invested or  
            reinvested by the Treasurer or may be invested in whole or in  
            part under contract with an investment manager, as determined  








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            by the board.


          14)Requires the board to annually prepare and adopt a written  
            statement of investment policy, which shall be considered at a  
            public hearing. 


          15)Allows transfer to be made from the program fund to the  
            administrative fund for the purpose of paying operating costs  
            associated with administering the ABLE program trust.  


          16)Requires all moneys paid by designated beneficiaries or  
            eligible individuals to be deposited as received into the  
            program fund, and shall be promptly invested and accounted for  
            separately.  


          17)Requires the board to maintain separate accounting for each  
            designated beneficiary.


          18)Requires the assets of the trust to be preserved, invested,  
            and expended solely and only for the purposes of the trust and  
            shall be held in trust for the designated beneficiaries and no  
            property rights shall exist in favor of California.  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.


          19)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:










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             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.


          20)Prevents a contribution made to an ABLE account from being  
            accepted unless the following conditions are satisfied:


             a)   The contribution is in cash; and,


             b)   Except in the case of contributions under IRC Section  
               529A(c)(1)(C), if the contribution to an ABLE account would  
               result in aggregate contributions from all contributors to  
               the ABLE account for the taxable year exceeding the amount  
               in effect under IRC Section 2503(b) for the calendar year  
               in which the taxable year begins.


          21)Provides that the designated beneficiary shall retain  
            ownership of all contributions made to the designated  
            beneficiary's ABLE account to the date of utilization for  
            qualified disability expenses, and all interest derived from  
            the investment of the contributions to the designated  
            beneficiary's ABLE account shall be deemed to be held in the  
            ABLE program trust for the benefit of the designated  
            beneficiary.  Contributions may not be pledged as collateral  
            for any loan.


          22)Requires the board to develop adequate safeguards to prevent  
            aggregate contributions on behalf of a designated beneficiary  
            in excess of the maximum contribution limits necessary to  
            provide for the qualified disability expenses of the  
            designated beneficiary.  








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          23)Provides that, notwithstanding any other law, moneys 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  
            a state or local means-tested program.


          24)Requires the board to provide an annual listing of  
            distributions to individuals with respect to an interest in an  
            ABLE account to the FTB at a time and in a manner and form as  
            specified by the FTB.  


          25)Requires the board to make a report to the appropriate  
            individual of any distribution to any individual with respect  
            to an interest in an ABLE account, at a time and in a form and  
            manner as required by the FTB.


          26)Requires the board to report the following to each designated  
            beneficiary on an annual basis:


             a)   The value of the designated beneficiary's account;


             b)   earned interest;


             c)   The rate of return of the investments in the designated  
               beneficiary's account for that reporting period; and,


             d)   Information on investments and qualified disability  
               expenses that designated beneficiaries can use to set  
               savings goals and contribution amounts. 









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          27)Requires the board to provide a means for designated  
            beneficiaries to express concerns or comments regarding the  
            ABLE program trust and any information required to be reported  
            by this section.


          28)Requires the board to adopt regulations as it deems necessary  
            to implement this chapter consistent with the federal IRC and  
            regulations issued to ensure that the program meets all  
            criteria for federal tax-exempt benefits.


          29)Provides that the board may adopt regulations to implement  
            this chapter as emergency regulations in accordance with the  
            rulemaking provisions of the Administrative Procedure Act.  


          30)Requires the board to market the ABLE program to residents of  
            California to the extent funds are available.


          31)Defines an "ABLE account" or an "account" as an account  
            established and owned by a designated beneficiary for the  
            purpose of meeting the qualified disability expenses of the  
            designated beneficiary of the account.


          32)Defines "administrative fund" as a fund used to administer  
            the ABLE program.


          33)Defines "board" as the California ABLE Act Board.


          34)Defines the "California ABLE Program Trust" or "ABLE Program  
            trust" as the trust created pursuant to the ABLE program.










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          35)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.


          36)Defines a "designated beneficiary" as the eligible individual  
            who established an ABLE account and is the owner of the  
            account.


          37)Defines the "federal ABLE Act" as the federal Stephen Beck  
            Jr., Achieving a Better Life Experience Act of 2014.


          38)Defines "investment management" as the functions performed by  
            a manager contracted to perform functions delegated by the  
            board.


          39)Defines "investment manager" as a manager contracted to  
            perform functions delegated by the board.


          40)Defines "program fund" as a separate fund held within the  
            California ABLE Program Trust.










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          41)Defines a "qualified ABLE program" or a "program" as a  
            program established to implement the federal ABLE act pursuant  
            to IRC Section 529A.


          42)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.


          FISCAL EFFECT:  According to the Assembly Appropriations  
          Committee:


          1)One-time costs likely in excess of $500,000 to the Treasurer  
            to establish the ABLE Act program; annual administrative costs  
            in the range of $300,000 to $400,000 to the Treasurer  
            thereafter to administer the program.  Initial funds will be  
            provided by way of General Fund (GF) loan, potentially as high  
            as $1.5 million, which will be repaid within five years.   
            Thereafter, the program will be funded through administrative  
            fees.


          2)Potentially significant administrative costs to the FTB.


          3)Estimated GF revenue decreases of $100,000, $400,000, and  
            $900,000 in Fiscal Year (FY) 2015-16, FY 2016-17, and FY  
            2017-18, respectively; additional decreases thereafter.








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          4)Substantial increase in MediCal costs as a result of exempting  
            ABLE assets, thus expanding the population of eligible  
            recipients.  Each new MediCal participant results in annual  
            costs of approximately $40,000, half of which is paid for with  
            state funds and half federal.


          The FTB estimates general fund revenue loss of $100,000 in 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 with disabilities must remain poor, and cannot  
          plan and save for large future expenses.


          In December 2014, President Obama signed the Achieving a  








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          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), Chapter 54, Statutes of 2010] and 2012  
          [SJR 18 (Pavley), Chapter 62, Statutes of 2012).


          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)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.


          3)Substantial Benefits:  The new ABLE program provides disabled  
            individuals and their families with two primary benefits.   
            First, the program dramatically expands eligibility for  








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            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  
            Supplemental Security Income (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.


          4)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  
            assets from $2,000 to $100,000 for disabled individuals  
            seeking eligibility for SSI.  


          5)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.  










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            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  
            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  








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            by the beneficiary, existing trusts may still be necessary  
            depending on individual circumstances.


          6)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  
            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.


          7)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 author may wish to reduce the tax imposed in  
            this bill for distributions that are included in income to  
            2.5%.









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          Analysis Prepared by:                                             
                          Carlos Anguiano / REV. & TAX. / (916) 319-2098    
                                                                    FN:  
          0001670