BILL ANALYSIS
AB 326
Page 1
Date of Hearing: May 18, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 326 (Garrick) - As Introduced: February 18, 2009
SUSPENSE
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Personal income tax: Health Savings Account (HSA):
deductions
SUMMARY : Conforms to federal tax law with respect to health
savings accounts (HSAs) for taxable years beginning on or after
January 1, 2010. Specifically, this bill :
1)Allows eligible individuals to claim an above-the-line
deduction related to their contributions to HSAs in computing
their adjusted gross income (AGI).
2)Treats an HSA as a tax-exempt trust for tax purposes.
3)Excludes from the gross income of the employee any
contributions to an HSA made by an employer on the employee's
behalf.
4)Includes HSAs as an approved option in a nontaxable cafeteria
plan for employee benefits created by an employer.
5)Adopts federal changes enacted in 2006 that enhance the HSAs
by:
a) Permitting the funds remaining upon termination of
health flexible spending arrangements or health
reimbursements arrangements to be transferred to HSAs.
b) Revising the annual deductible limitation on
contributions to HSAs to disregard the amount of the annual
deductible under the high deductible health plan (HDHP).
c) Modifying the cost-of-living adjustments for Consumer
Price Index for a calendar year to use the 12-month period
ending on March 31 of the calendar year rather than the
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12-month period ending on August 31, of the preceding
calendar year.
d) Eliminating the requirement to prorate the amount of HSA
contribution based on the number of months of enrollment in
an HDHP for an individual who becomes covered under the
HDHP during the taxable year in a month other than January.
e) Enacting an exception to the requirement for comparable
contributions by employers to permit employers to make
larger contributions for non-highly compensated employees
than for highly compensated employees.
f) Permitting participants to make a one-time distribution
from an individual retirement account (IRA) to fund an HSA.
g) Allows a taxpayer to rollover the balance of an existing
Archer medical savings account (Archer MSA) to an HSA for
taxable years beginning on or after January 1, 2010,
without penalty.
h) Imposes a penalty for a disqualified distribution equal
to 2 % of the distribution amount, rather than 10% as
provided by federal law.
i) Does not conform to the federal 6% excise tax on excess
contributions.
j) Imposes a $50 penalty for failing to make required
reports.
6)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW:
1)The Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 (Public Law 108-173) established HSAs, beginning
in tax year 2004.
2)Defines an HSA as a tax-exempt trust or custodial account
created exclusively to pay for the qualified medical expenses
of the account holder and his/her spouse and dependents.
3)Allows any balance in an HSA to grow on a tax-free basis.
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4)Allows individuals with an HDHP, and no other health plan
other than a plan that provides certain permitted coverage, to
establish an HSA.
5)Allows a deduction for contributions to HSAs when computing
AGI, if made by an eligible individual. Distributions from an
HSA for qualified medical expenses of the eligible individual,
spouse or dependents are not includible in gross income.
6)Defines "qualified medical expenses" as medical expenses
including expenses for diagnosis, cure, mitigation, treatment,
or prevention of disease, including prescription drugs,
transportation primarily for and to such care, and qualified
long-term care expenses. Distributions made for non-qualified
medical expenses are includible in gross income and also
subject to an additional 10% tax, unless the distributions are
made after death, disability, or after the individual attains
the age of Medicare eligibility.
7)Specifies that medical expenses paid via distributions that
are excludable from income may not be claimed as medical
expenses for purposes of reporting itemized deductions.
8)Excludes contributions to an HSA from income and employment
taxes if made by the employer. Eligible individuals include
those covered by high-deductible health plans and, in general,
are not eligible for other health coverage.
9)Specifies the maximum aggregate annual contribution that may
be made to an HSA by or on behalf of the eligible individual,
which is the lesser a) 100% of the annual deductible under the
HDHP, or, b) $3,000 in the case of self-only coverage and
$5,950 in the case of family coverage for 2009 tax year.
Those limits are indexed for inflation.
10)Allows employers to make larger HSA contributions for
non-highly compensated employees than for highly compensated
employees.
11)Includes the balance remaining in an HSA after the death of
the eligible individual in the gross estate of the decedent
unless the decedent's spouse is the beneficiary of the HSA.
In that case, the HSA balance is deducted in computing the
taxable estate and the HSA passes to the surviving spouse,
subject to the general restrictions on, and taxation of,
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distributions.
12)Imposes numerous reporting requirements related to HSAs.
Employer contributions to the HSAs must be reported on the
employees Form W-2. In addition, the trustee of the HSA must
report information on distributions, contributions, and other
required information to the Secretary of the Treasury. Health
insurance providers must report information as required by the
Secretary of the Treasury.
13)Authorizes a direct transfer of funds from the health
Flexible Spending Arrangements (FSAs) or Health Reimbursement
Arrangements (HRAs) to an HSA, but limits the amount that may
be transferred to an amount equal to the lesser of (a) the
balance in the health FSA or HRA as of September 21, 2006, or
(b) the balance in the health FSA or HRA as of the date of the
transfer.
14)Authorizes a one-time contribution to an HSA of amounts
distributed from an IRA as a direct trustee-to-trustee
transfer. Excludes the transfer amount from the gross income
of the accountholder and from the 10% penalty on early IRA
distributions.
15)Allows tax-benefited medical accounts called Archer MSAs.
The Acher MSAs create a tax-exempt trust or custodial account
for the benefit of the account holder. Rules similar to those
for IRAs apply to the Archer MSAs. Archer MSAs do not provide
the assistance needed by many working families and do not
receive widespread support or participation. As part of the
legislation enacting HSAs, participants of Archer MSAs are
able to transfer or rollover their balances from the Archer
MSAs to a new HSA. This transfer specifically is not treated
as a disqualifying distribution.
EXISTING STATE LAW allows tax-benefited growth and use of funds
for qualified medical expenses, conforming to the federal rules
for Archer MSAs. However, California has not adopted the HSAs
created as part of the 2003 federal legislation. Due to the
lack of conformity, California taxpayers will be disadvantaged
financially if they rollover (transfer) their Archer MSAs to
HSAs. Although specifically approved for federal tax purposes,
the transfer is a disqualified distribution for California tax
purposes, includable in income and subject to tax as well as an
additional 10% penalty. Similarly, transfers of funds from IRAs
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will be treated as income subject to tax, and potentially
subject to the 2 % penalty for early distribution.
FISCAL EFFECT : Franchise Tax Board (FTB) staff estimate a
revenue loss from this bill of $18 million in fiscal year (FY)
2009-10, $55 million in FY 2010-11, and $60 million in FY
2011-12.
COMMENTS :
1)The author states, "Health Savings Accounts [HSAs] were
created with the passage of the 2003 Medicare bill signed by
President Bush. HSA's allow for individuals to plan ahead for
qualified medical expenses on a tax free basis. HSA's have
also been used to defray the costs associated with High
Deductible Health Plans. HDHP's & HSA's give individuals
further flexibility when determining what type of health care
coverage is best for them. HSA's and HDHP's offer consumers
security, affordability, flexibility and they are 100%
portable. By encouraging contributions to HSA's we make
insurance that much more affordable.
"AB 326 encourages the use of HSA's by allowing for a tax
deduction for contributions made to an HSA by, or on behalf
of, an eligible individual. AB 326 would extend the option of
contributing to any eligible HSA to employers who may be
interested in exploring cost-effective ways to help employees
defray medical expenses.
"Encouraging the uninsured to purchase health insurance by
allowing this tax deductible option, will reduce the number of
uninsured, and accordingly, reduce costs associated with
providing healthcare to the uninsured. Reducing healthcare
costs will make healthcare insurance more affordable for all.
Furthermore, allowing employers to contribute to
tax-deductible HSA's on behalf of their employees provides a
low-cost mechanism to offer their employees an additional
benefit. Many employers would provide some form of health
benefit to their employees if it were cost efficient.
"This is a simple conformity measure, bringing California inline
with federal HSA provisions. Currently, California is one of
only five states that taxes contributions to Health Savings
Accounts. Given our current healthcare crisis, we should be
creating incentives for people to save for future healthcare
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costs, and AB 326 creates one such incentive."
2)Proponents state that HSAs, when combined with HDHPs, present
an option for business to provide some health insurance for
employees rather than none at all. Proponents point to the
growth of HSA use and cite data that shows a third of all
HSA/HDHP purchases were made by those previously uninsured.
According to proponents, use of HSAs help individuals take
control of how their health care dollars are spent, and enable
them to save for future medical expenses and retiree-health
expenses on a tax-free basis. In fact, HSAs improve upon
existing tax-deductible saving options because both the
employer and employee may contribute to an employee's HSA
without increasing the employee's taxable income. Also,
unspent funds roll over from year to year and move with an
employee. Because California is one of only a few states that
do not permit HSAs, California employees of multistate or
multinational employers will not enjoy the tax advantages of
HSAs, thereby paying more for the same medical coverage.
Proponents also point out that HSAs provide one the fastest
growing coverage options for those currently lacking health
insurance coverage, and, while HSAs are not for everyone, 6.1
million people were covered by HSAs/HDHPs in January of 2008.
Proponents argue that, in light of the skyrocketing cost of
healthcare, California taxpayers are continually searching for
help in easing the high price of health services.
Finally, the proponents believe that this measure will save
California taxpayers much confusion and heartache in filling
out their income tax forms.
3)Opponents state that this bill amounts to a tax giveaway for
holders of HSAs because they already have the financial
resources to afford health insurance. According to the
opponents, this bill would benefit only high wage earners, as
demonstrated in a January 2006 report from the Government
Accountability Office, and would do nothing to make health
care more affordable for the uninsured and low-income earners
or will force people on Medicare or other assistance programs
to buy care they cannot afford.
Opponents also argue that HSAs actually limit consumer choice
and ultimately cost low- and middle-income workers more money
because HSAs must be coupled with HDHPs. Opponents contend
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that HDHPs are bad for workers as they discourage sick workers
and their families from seeking care for routine illnesses,
potentially leading to subsequent health care costs that are
much higher than they would have been with early treatments.
Opponents believe that this cycle of high barriers to care and
worsening illnesses hurts working families. Furthermore,
Harvard Medical School researches found that HSAs are more
costly for women, largely because women need routine medical
exams, mammograms, vaccines, Pap tests, birth control and
pregnancy-related services.
Additionally, opponents assert that HSAs hurt the health system
as a whole because the health system needs to spread its risk.
Taking healthy individuals out of the insurance pool
increases the cost to those in need of more extensive health
insurance. Finally, opponents argue that this measure would
result in a revenue loss that could impact the provision of
critical firefighting and public safety services and that
health care costs must be dealt with by containing health care
costs, harnessing the power of group purchasing and regulating
health insurers more efficiently.
4)Committee staff note all of the following:
a) California adjustments . Because California has not
conformed to any of the federal HSA provisions, a taxpayer
taking a deduction on his/her federal personal income tax
return is required to increase his/her AGI on the
California personal income tax return by the amount of that
deduction. In addition, any interest earned on the HSA
account must be added to the taxpayer's AGI for California
tax purposes, and any contributions made by the taxpayer's
employer to the HSA, must be included in the taxpayer's
AGI.
b) Tax incentive for high-income taxpayers . An HSA is a
savings account that provides for tax-deductible deposits
and allows tax-free withdrawals, as long as the funds are
used for qualified medical expenses. In contrast, a
traditional IRA allows tax-deductible contributions but
subject distributions to tax. Further, in the case of a
Roth IRA, contributions to the account are taxable, but
qualified distributions are tax-free. In addition, both a
traditional IRA and a Roth IRA have income limitation
restricting eligibility. HSAs have no income restrictions
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and are available to anyone. In its 2006 report, the
United States Government Accountability Office found that
the median income of tax filers reporting an HSA
contribution in 2004 was $133,000 and 51% of those tax
filers contributing to HSAs had an income of $75,000 or
more. It appears that HSAs disproportionately benefit
high-income individuals.
c) Implementation Concerns . This bill does not address the
impact of HSAs created before the effective date of this
bill. Without addressing the tax treatment of HSAs created
before 2010, there might be implementation concerns because
part of the HSA will be pre-tax dollars and part will be
post-tax dollars. Additional legislation or regulations
would be required to provide guidance to FTB with respect
to treatment of qualified and disqualified distributions
from such HSAs. Because California is one of only four
states that have not adopted HSAs, there may be
implementation concerns from employees that move into
California from a conforming state.
d) Partial Conformity . An alternative step to full
conformity available would be to remove the penalty
associated with rollovers of Archer MSA and IRA funds,
which are both allowed tax-free for federal purposes. As
mentioned above, the Archer MSA rollover is a disqualified
distribution and subjected to both income tax and a penalty
for disqualified distributions. Similarly, the transfer of
funds from an IRA is subject to income tax and might be an
early withdrawal subject to a penalty (if the
transferor/IRA owner is less than age 59 when the
transfer is made). California could choose to make those
distributions or transfers not subject to penalty.
e) Conformity Bill. This bill fully conforms California
law to federal HSA provisions beginning with tax year 2010.
California does not automatically conform to federal law
but instead considers each provision individually. The
last California-federal conformity bill was enacted in 2005
[AB 115 (Klehs), Chapter 691, Statutes of 2005]. It
appears that the omnibus California-federal conformity bill
would be a more appropriate vehicle for conforming to the
federal HSA provisions.
5)Related Legislation . Committee staff notes that the issue of
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conformity to federal HSA legislation has been proposed in
every legislative session since the federal law was enacted.
AB 2292 (Garrick), introduced in the 2007-08 Legislative
Session, is similar to this bill, but would have applied to
taxable years beginning on or after January 1, 2008. AB 2292
was held in this committee.
AB 84 (Nakanishi/Smyth), introduced in the 2007-08 legislative
session, is similar to this bill. AB 84, as amended on March
12, 2007, would have conformed to federal HSA provisions
starting with taxable year 2008. AB 84 was held in this
committee.
AB 142 (Plescia), introduced in the 2007-08 legislative session,
is nearly identical to this bill. That bill would have
conformed to federal HSA provisions starting with taxable year
2008, which is the same as this bill; however, AB 142
specified a different nonconformity period than this bill. AB
142 was held in the Senate Revenue and Taxation Committee.
AB 245 (DeVore), introduced in the 2007-08 legislative session,
is identical to AB 142. AB 245 was held in this committee.
SB 25 (Maldonado and Runner), introduced in the 2007-08
legislative session, is identical to this bill. SB 25 was
held in the Senate Revenue and Taxation Committee.
SBx1 10 (Maldonado), introduced in the 2007-08 legislative
session, is nearly identical to this bill, except that
conformity to the federal HSA provisions would apply starting
with taxable year 2006. SBx1 10 failed to pass the Senate
Health Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
American's Health Insurance Plans
Association of California Life & Health Insurance Companies
California Association of Health Plans
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California Association of Health Underwriters
California Chamber of Commerce
California Medical Association
California Retailers Association
California Chiropractic Association
California Society of Enrolled Agents
California Taxpayers' Association
John Deere
Health Net
National Federation of Independent Business
Opposition
Amalgamated Transit Union
American Federation of State, County and Municipal Employees,
AFL-CIO
California Conference of Machinists
California Federation of Teachers
California Labor Federation
California Nurses Association
California Professional Firefighters
California School Employees Association
California Tax Reform Association
California Teamsters Public Affairs Council
Engineers and Scientists of California
IFPTE Local 21
International Longshore and Warehouse Union
San Diego County Court Employees Association
Strategic Committee of Public Employees, Laborers' International
Union of North America
UNITE HERE!
United Food and Commercial Workers Union, Western States Council
Analysis Prepared by : Oksana G. Jaffe / REV. & TAX. / (916)
319-2098