BILL ANALYSIS
SJR 30
Page 1
Date of Hearing: August 9, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
SJR 30 (Kehoe) - As Amended: May 24, 2010
SENATE VOTE : 33-0
SUBJECT : Deferred compensation plans.
SUMMARY : Urges the Untied States (U.S.) Congress and the
President to allow all eligible state and local government
employees participating in U. S. Internal Revenue Code (IRC)
Section 457(b) [457(b)] deferred compensation plans to treat
their elective deferrals as designated Roth contributions.
Specifically, this resolution makes:
1)A request from the California Legislature to Congress and the
President of the U.S. to enact legislation that would do both
of the following:
a) Amend the IRC to allow all eligible government employees
who participate in a 457(b) deferred compensation plan the
option to treat their elective deferrals as designated Roth
contributions.
b) 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 Ac of 2001 and the
federal government's Thrift Savings Plan.
2)Findings to support the request and resolves that the
Secretary of the U. S. Senate transmit copies of the
resolution to specified elected officials.
EXISTING LAW:
1)Permits employers to establish a pension, profit-sharing, or
stock bonus plan that qualifies for certain tax benefits.
Eligible profit-sharing or stock-bonus plans may include a
cash or deferred arrangement where each participating employee
has the option of receiving an amount of their compensation in
cash or having it contributed pre-tax to the plan [the
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so-called 401(k) plans]. Individuals contributing to their
401(k) retirement plans have the option of treating their
elective deferrals to the plan as designated Roth Individual
Retirement Account (IRA) contributions. Participants in the
federal government's Thrift Savings Plan, which is open to
civilian federal employees and military members, have a
similar option.
2)Allows individuals who receive compensation that is includible
in gross income and who are under age 70 to establish and
contribute to a traditional IRA. Contributions to a
traditional IRA, generally, are deductible, and amounts earned
in the account are not taxed until distributions are made.
However, when an individual, or the individual's spouse, is an
active participant in an employer-maintained retirement plan,
the deduction may be reduced or eliminated. A non-traditional
IRA - a so-called "Roth IRA" - is subject to the same rules
that apply to traditional IRAs; however, contributions to a
Roth IRA are never deductible and qualified distributions,
i.e. earnings generated by those contributions, are free from
federal income tax when the individual withdraws the funds
from the account. "Qualified distributions" may not be made
before the end of the five-year period, beginning with the
first tax year for which the individual made a contribution to
the Roth IRA.
3)Authorizes state and local governments and private tax-exempt
organizations to sponsor deferred compensation plans, commonly
referred to as IRC Section 457 plans. Under a state or local
government plan, the amount of deferred compensation is
included in an employee's income only when it is paid to the
employee. However, participants in IRC Section 457(b)
deferred compensation plans do not have the option of treating
elective deferrals as designated Roth contributions.
FISCAL EFFECT : Unknown.
COMMENTS :
1)Author's Statement . The author states that, "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
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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."
2)Purpose of this Resolution . This resolution is intended to
provide state and local public sector employees with the
option of paying taxes on their deferred contributions to a
457(b) plan in exchange for receiving tax free distributions
at retirement. According to the sponsor, "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."
3)Background . Former President George W. Bush signed the
Economic Growth and Tax Reconciliation Act of 2001 on June 7,
2001, which granted the participants in 401(k) and 403(b)
retirement plans 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. 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 H.R. 4213 in a House vote
concurring on Senate amendments on May 28, 2010.
4)Designated Roth IRA contributions . As with traditional 401(k)
plans, contributions to a traditional 457(b) plan are made on
a pre-tax basis and 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-free and
distributions are taxed when withdrawn. In contrast,
contributions to a Roth IRA are made on an after-tax basis and
are subject to federal and state income taxes at the time the
contribution is made. The Roth IRA contribution limit is
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lower - it is capped at $5,000 in 2010 ($6,000 for employees
50 or over) - but distributions are not taxed as long as they
are "qualified distributions." Designated Roth contributions
resemble regular Roth IRA contributions but are not subject to
the annual income limitation requirements. Also,
contributions to a designated Roth account do not preclude an
individual from making contributions to a Roth IRA account.
Allowing 457(b) plan participants an option to treat their
elective deferrals as designated Roth contributions would
create an alternative retirement savings vehicle for state and
local government employees, while providing the state with
immediate tax revenue. Since designated Roth contributions
are taxed when made, the state would receive revenue without
delay. In the case of a traditional contribution, the state
would not collect the tax until a distribution is made. In
fact, if 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.
Designated Roth contributions may help the state in these
difficult economic times and, at the same time, minimize the
amount of tax paid by state and local government employees
during their retirement years.
REGISTERED SUPPORT / OPPOSITION :
Support
Association for Los Angeles Deputy Sheriffs
CalPERS' Board of Administration
County of San Diego
Los Angeles County Probation Officers Union, AFSCME, Location
685
Riverside Sheriffs' Association
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098