BILL ANALYSIS
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|SENATE RULES COMMITTEE | SJR 30|
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CONSENT
Bill No: SJR 30
Author: Kehoe (D), et al
Amended: 5/24/10
Vote: 21
SENATE REVENUE & TAXATION COMMITTEE : 3-0, 6/9/10
AYES: Wolk, Alquist, Padilla
NO VOTE RECORDED: Walters, Ashburn
SUBJECT : Deferred compensation plans
SOURCE : Dan McAllister, Treasurer-Tax Collector, County
of San
Diego
DIGEST : This resolution urges the Congress and the
President of the United States to amend the United States
Internal Revenue 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. This resolution also urges
the Congress and the President of the United States to
create parity among all workers by presenting 457(b) plan
participants with savings choices similar to those given to
participants planning for retirement under the Economic
Growth and Tax Reconciliation Act of 2001 and the federal
government's Thrift Savings Plan.
ANALYSIS : Existing federal law permits 401(k) plans for
all individuals with the exception of federal, state and
CONTINUED
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local government employees, and allows 403(b) plans for
employees of education systems or tax-exempt organizations
under Section 501(c)(3) of the Internal Revenue Code (IRC).
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.
Comments
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
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".
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
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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, House Resolution
4213 was amended in the United States 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.
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
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 do not preclude an individual from making
contributions to a Roth IRA account.
Since designated Roth contributions are taxed when made,
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the state receives revenue without delay - it is 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 is 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 bill's sponsor, Dan McAllister, San Diego County
Treasurer-Tax Collector, 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
most beneficial to their individual needs."
FISCAL EFFECT : Fiscal Com.: No
SUPPORT : (Verified 6/10/10)
Dan McAllister, Treasurer-Tax Collector, County of San
Diego (source)
County of San Diego
Public Employees Retirement System
DLW:mw 6/10/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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