BILL ANALYSIS Ó
SB 324
Page 1
SENATE THIRD READING
SB
324 (Pavley)
As Amended August 17, 2015
Majority vote
SENATE VOTE: 40-0
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|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 | |
| | | | |
| | | | |
SB 324
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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