BILL ANALYSIS Ó SB 324 Page 1 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 | | | | | | | | | | | | SB 324 Page 2 ------------------------------------------------------------------ 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: SB 324 Page 3 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; SB 324 Page 4 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 SB 324 Page 5 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 SB 324 Page 6 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 SB 324 Page 7 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: SB 324 Page 8 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. SB 324 Page 9 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. SB 324 Page 10 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. SB 324 Page 11 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. SB 324 Page 12 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. SB 324 Page 13 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 SB 324 Page 14 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 SB 324 Page 15 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. SB 324 Page 16 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 SB 324 Page 17 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%. SB 324 Page 18 Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098 FN: 0001670