BILL ANALYSIS Ó
SB 324
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SENATE THIRD READING
SB
324 (Pavley)
As Amended September 4, 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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| | | | |
| | | | |
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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, on or after January 1, 2016, the Personal Income Tax
(PIT) Law to the Internal Revenue Code (IRC) Section 529A,
relating to qualified ABLE programs.
2)Reduces the penalty for unqualified distributions from 10% to
2.5% for state purposes.
3)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).
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)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
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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 a contribution shall not be accepted if either
of the following occur:
a) The contribution is not in cash; or,
b) Except in the case of contributions under IRC Section
529A(c)(1)(C), 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.
7)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.
8)Requires the board to develop adequate safeguards to prevent
aggregate contributions on behalf of a designated beneficiary
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in excess of the maximum contribution limits necessary to
provide for the qualified disability expenses of the
designated beneficiary.
9)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.
10)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.
11)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.
12)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
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by this section.
13)Provides that the ABLE program shall be construed liberally
in order to effectuate its legislative intent.
14)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.
15)Defines "administrative fund" as a fund used to administer
the ABLE program.
16)Defines "board" as the California ABLE Act Board.
17)Defines the "California ABLE Program Trust" or "ABLE Program
trust" as the trust created pursuant to the ABLE program.
18)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.
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19)Defines a "designated beneficiary" as the eligible individual
who established an ABLE account and is the owner of the
account.
20)Defines the "federal ABLE Act" as the federal Stephen Beck
Jr., Achieving a Better Life Experience Act of 2014.
21)Defines "investment management" as the functions performed by
a manager contracted to perform functions delegated by the
board.
22)Defines "investment manager" as a manager contracted to
perform functions delegated by the board.
23)Defines "program fund" as a separate fund held within the
California ABLE Program Trust.
24)Defines a "qualified ABLE program" or a "program" as a
program established to implement the federal ABLE act pursuant
to IRC Section 529A.
25)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
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under regulations and consistent with the purposes of the
federal ABLE Act.
26)Provides that this bill shall only become effective if AB 449
(Irwin of the current legislative session is enacted.
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.
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.
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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
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.
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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)Splitting the ABLE Program. Both this bill and AB 449
contained identical language establishing the California ABLE
Program. The authors have agreed to split the provisions of
the bill. The recent amendments deleted from this bill will
be included in AB 449.
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
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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.
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
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
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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
by the beneficiary, existing trusts may still be necessary
depending on individual circumstances.
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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
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.
Analysis Prepared by:
Carlos Anguiano / REV. & TAX. / (916) 319-2098
FN:
0002147