BILL ANALYSIS Ó SB 324 Page 1 SENATE THIRD READING SB 324 (Pavley) As Amended September 4, 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, 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 SB 324 Page 3 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 SB 324 Page 4 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 SB 324 Page 5 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. SB 324 Page 6 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 SB 324 Page 7 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. SB 324 Page 8 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. SB 324 Page 9 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 SB 324 Page 10 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 SB 324 Page 11 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. SB 324 Page 12 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