BILL ANALYSIS 1
AB 104
Page 1
Date of Hearing: April 13, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 104 (Charles Calderon) - As Amended: April 1, 2009
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Personal income tax: Federal conformity: Pension
plans
SUMMARY : Conforms to the federal Pension Protection Act of 2006
(PPA) relating to certain early distributions made to public
safety employees from qualified retirement plans. Specifically,
by reference to federal law, this bill :
1)Waives the early withdrawal penalty for distributions made
from a governmental plan, which is a defined benefit plan, to
a qualified public safety employee.
2)Defines "government plan" as an eligible deferred compensation
plan established and maintained for its employees by the
United States government, a state or local government, or by
any of its agency or instrumentality, or an Indian tribal
government.
3)Defines "qualified public safety employee" as an employee of a
state or political subdivision of a state if the employee
provides police protection, firefighting services, or
emergency medical services for any area within the
jurisdiction of the state or political subdivision.
4)Requires that the qualified public safety employee receive
distribution from a government defined plan after separating
from service with the employer maintaining the plan.
5)Applies to distributions made to an employee who separates
from services after the age of 50.
6)Applies to distributions made in taxable years beginning on or
after January 1, 2010.
AB 104
Page 2
7)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW :
1)Imposes a 10% withdrawal penalty tax on early distributions
made from a qualified retirement plan to a taxpayer under the
age of 59 . The 10% additional early withdrawal tax is
calculated as 10% of the amount of the distribution received
that is includible in the taxpayer's income, unless an
exception applies. For example, the 10% early withdrawal
penalty does not apply to distributions made to an employee
who separated from service after the age of 55, or to
distributions that were part of a series of substantially
equal periodic payments made for the life of the employee or
the joint lives of the employee and his/her beneficiary. In
addition, for distributions made after August 17, 2006,
Section 882 of the PPA of 2006 amended the Internal Revenue
Code (IRC) Section 72(t) to provide an exception from the 10%
penalty for distributions from a governmental defined benefit
pension plan to a qualified public safety employee who
separates from service after the age of 50. The exception
applies to distributions made to public safety employees after
December 31, 2006.
2)Provides tax relief to public safety officers who use
distributions received from governmental plans to pay for
health and long-term care insurance for himself/herself or
his/her spouse or dependents (IRC Section 402, as amended by
Section 845 of the PPA). This exception from the 10% penalty
tax applies to distributions made after December 31, 2006.
EXISTING STATE LAW:
1)Conforms to federal law, as of January 1, 2005, with respect
to taxation of qualified retirement plans, except that
California imposes the early withdrawal penalty at 2 %,
rather than 10%. While some federal law changes relating to
qualification of federal plans are automatically incorporated
into California tax laws, specific state legislation in other
areas is required for federal law enacted after the last
conformity date to apply for California tax purposes.
2)Provides that federal changes to Part I of Subchapter D of
AB 104
Page 3
Chapter 1 of IRC Sections 401 through 420, inclusive, relating
to pension, profit-sharing, stock bonus plans, other employee
benefit plans, and IRC Section 457, relating to deferred
compensation plans of state and local governments and
tax-exempt organizations, automatically apply without regard
to taxable years to the same extent as applicable for federal
income tax purposes. All federal changes made to those IRC
sections are automatically adopted by California without
regard to the specified date. Therefore, as of December 31,
2006, California automatically conformed to the PPA changes to
IRC Section 402 relating to employee benefits plans and
already allows public safety officers to use up to $3,000 of
distributions from governmental plans to pay for qualified
health insurance premiums or qualified long-term care
insurance contracts.
FISCAL EFFECT : The Franchise Tax Board (FTB) estimates that
this bill will result in a revenue loss of $90,000 in the
2009-10 fiscal year (FY), $200,000 in FY 2010-11, and $200,000
in FY 2011-12.
Proposition 98 Fiscal Effect : Unknown.
COMMENTS :
1)The author states that, "This bill would provide much-needed
tax relief for public safety employees and would bring
California into further conformity with the federal tax law by
waiving the 2.5% early withdrawal penalty on distributions
from pension plans."
2)The proponents of this bill argue that the waiver of the 10%
penalty would provide more flexibility for public safety
employees in their investment decisions, would ease a tax
compliance burden, would improve taxpayer compliance, and
would reduce tax agency administrative costs.
3)The Committee staff notes all of the following:
a) This bill provides partial conformity to federal tax
laws by allowing relief from penalty for early
AB 104
Page 4
distributions made to public safety employees. California
already conforms to the PPA provision providing an
exclusion from gross income for distributions from eligible
governmental plans to be used to pay qualified health
insurance premiums and long-care costs and, therefore, no
state legislation is needed to conform to that provision.
b) The last California-federal conformity bill was enacted
in 2005 [AB 115 (Klehs), Chapter 691, Statutes of 2005].
c) This bill is identical to AB 1561 (Calderon), as amended
on April 10, 2007, introduced in the 2007-08 Legislative
Session. AB 1561, in its final form, was a comprehensive
California-federal conformity measure that failed passage
in the Senate.
REGISTERED SUPPORT / OPPOSITION :
Support
Peace Officers Research Association of California (PORAC)
California Professional Firefighters
California Taxpayers' Association
Association for Los Angeles Deputy Sheriffs
Riverside Sheriffs' Association
California Society of Enrolled Agents
L.A. County Probation Officers Union
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098