BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SJR 30 - Kehoe
Amended: May 24, 2010
Hearing: June 9, 2010 Fiscal: No
SUMMARY: Urges Congress and the President to Allow
Eligible Government Employees in 457(b) Deferred
Compensation Plans to Treat Elective Deferrals as
Designated Roth Contributions.
EXISTING FEDERAL LAW permits 401(k) plans for all
individuals with the exception of federal, state and local
government employees, and allows 403(b) plans for employees
of education systems or tax-exempt organizations under IRC
501(c)(3). Individuals participating in 401(k) and 403(b)
retirement plans have the option to treat their elective
deferrals as designated Roth contributions; participants in
the federal government's Thrift Savings Plan, open to
civilian federal employees and military members, have this
option as well. Traditionally, elective deferrals are made
on a pre-tax basis whereas designated Roth contributions
are made on an after-tax basis.
State or local governments or a tax-exempt
organization under IRC 501(c) may establish 457(b) plans
for its employees. However, participants in 457(b)
deferred compensation plans do not have the option to treat
elective deferrals as designated Roth contributions.
EXISTING STATE LAW conforms to federal law.
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THIS RESOLUTION makes a request from the Legislature
to Congress and the President of the United States to amend
the IRS Code to allow all eligible government employees
participating in a 457(b) deferred compensation plan the
option to treat their elective deferrals as designated Roth
contributions. The measure urges Congress and the
President to create parity among all workers by presenting
457(b) plan participants with savings choices similar to
those given to participants under the Economic Growth and
Tax Reconciliation Act of 2001 and the federal government's
Thrift Savings Plan. This resolution also makes findings
to support the request and resolves that the Secretary of
the Senate transmit copies of this resolution to specified
elected officials.
FISCAL EFFECT:
Committee staff estimates a potential increase in tax
revenue based on timing; designated Roth contributions are
taxed when contributed while traditional contributions are
taxed when distributed. (See Comment C)
COMMENTS:
A. Purpose of Resolution
According to the author, "In June 2009, President
Obama signed the Federal Retirement Reform Act of 2009 into
law which granted federal workers who are enrolled in the
federal government's Thrift Savings Plan the option to
treat elected deferrals as designated Roth contributions.
However, the federal government has not extended this
privilege to local government and state governmental
employees. By allowing California workers to have this
retirement option, California will receive immediate tax
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revenue based on the contributions to the plan and the
employees will benefit from the ability to withdraw their
retirement money tax free when they retire".
B. Background
President George W. Bush signed the Economic Growth
and Tax Reconciliation Act of 2001 on June 7, 2001 granting
401(k) and 403(b) retirement plan participants the option
to treat elective deferrals as designated Roth
contributions beginning January 1, 2006. On June 22, 2009
the Federal Retirement Reform Act of 2009 was signed by
President Obama providing participants in the federal
government's Thrift Savings Plan the same option, which is
expected to be implemented in 2011. No current option
exists for 457(b) plan participants to treat elective
deferrals as designated Roth contributions. On March 10,
2010, H.R. 4213 was amended in the U.S. Senate to allow
Roth accounts within 457(b) plans. However, the provision
was subsequently excluded from the bill in a House vote
concurring on Senate amendments on May 28, 2010.
C. A Win-Win
Designated Roth contributions are a new type of
contribution, not a new type of plan, which new or existing
plans can accept. Allowing 457(b) plan participants the
option of treating their elective deferrals as designated
Roth contributions gives them another savings choice while
providing the state with immediate tax revenue. As with
traditional 401(k) and 403(b) plans, contributions to a
traditional 457(b) plan are made on a pre-tax basis;
taxable income is reduced by the amount of the
contribution, which is limited to $16, 500 in 2010 ($22,000
for employees 50 or over). The investment grows
tax-deferred and distributions, including contributions and
earnings, are taxed when withdrawn. Designated Roth
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contributions are made on an after-tax basis and subject to
federal and state income taxes at the time the contribution
is made. The contribution limit is also capped at $16,500
in 2010 ($22,000 for employees 50 or over). Distributions
are not taxed when withdrawn assuming they meet the
requirements of a "qualified distribution". (The
contribution limitation is by individual and not by plan.
It is permissible to split the annual employee elective
contribution between designated Roth contributions and
traditional pre-tax contributions but the combination
cannot exceed the limitation.)
Designated Roth contributions resemble Roth IRA
contributions but with several distinctions, including no
annual income limitation requirements to participate in a
designated Roth account. The Roth IRA contribution limit
is lower; it is capped at $5,000 in 2010 ($6,000 for
employees 50 or over). Contributions to a designated Roth
account don't preclude an individual from making
contributions to a Roth IRA account.
Since designated Roth contributions are taxed when
made, the state receives revenue without delay: It's a
matter of timing. The state would eventually receive tax
revenue from a traditional contribution, and because the
tax is paid at the time of distribution, the amount of
revenue would likely be higher given years of potential
investment growth. However, as the current economy and
stock market conditions indicate, there are no guarantees.
It's a trade-off: A designated Roth contribution gives the
plan participant a sense of control while providing the
state with immediate tax revenue.
As the sponsor states, "Roth contributions can be
valuable for a variety of reasons. Most notably, Roth
contributions provide certainty regarding the rate at which
the participant will be taxed and Roth contributions can be
particularly beneficial to individuals who expect to be in
a high tax bracket upon retirement. Extending the Roth
option to 457(b) plans would give participants flexibility
to pay their income tax obligations at the time that is
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most beneficial to their individual needs."
Support and Opposition
Support: Dan McAllister, Treasurer-Tax Collector,
County of San Diego (sponsor), CalPERS, County of San Diego
Oppose: None received.
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Consultant: Mary Beth Faulkner