BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 594 - Ashburn
As Amended April 16, 2009
Hearing: May 13, 2009 Tax Levy Fiscal: Yes
SUMMARY: Creates a 15-percent credit for "cafeteria plans"
EXISTING LAW
Health Care Benefits and Cafetreria Plans
Current federal law allows employers to extend certain
benefits, including health care benefits, to employees
without requiring inclusion of such benefits in the gross
income of employees. For example, employees can exclude
from gross income amounts received from an employer,
directly or indirectly, as reimbursement for expenses for
the medical care of the employee, the employee's spouse,
and the employee's dependents.
An employee also excludes from gross income the
cost-that is, premiums paid-of employer-provided coverage
under an accident or health plan.<1> Insurance premiums
paid for partners and more-than-2 percent S corporation
shareholders are not excludable. Highly compensated
individuals who benefit from an employer's "self-insured"
medical reimbursement plan that discriminates in favor of
"highly compensated employees," as those terms are defined,
must include in income benefits not available to other
------------------------
<1> IRC 106.
SB 594 - Ashburn Page 6
participants in the plan.<2>
Under federal law, employers are allowed to offer a
choice of benefits-assuming such benefits are otherwise
excluded from gross income under a specific provision of
the Internal Revenue Code (IRC)-or cash to employees. Such
a plan is referred to as a "cafeteria plan," under Section
125 of the Internal Revenue Code. It is a written plan
under which employee-participants may choose their own
"menu" of benefits consisting of cash and "qualified
benefits." No amount is included in the gross income of
the employee-participant in a cafeteria plan solely
because, under the plan, the participant may choose among
the benefits of the plan. Employer contributions to a
cafeteria plan can be made under a salary reduction
agreement with the employee-participant if it relates to
compensation that hasn't been received by, and does not
become currently available to, the participant.
A cafeteria plan can also include "flexible spending
accounts" (FSAs) that are funded by employee contributions
on a pre-tax salary reduction basis to provide coverage for
specified expenses-such as qualified medical expenses or
dependent care assistance-that are incurred during the
coverage period and may be reimbursed.
The practical benefit of cafeteria plans is that
employees may make contributions in payment of benefits,
such as insurance premiums, on a pre-tax basis. Such
contributions reduce the amount of wages that would
otherwise be subject to social security and Medicare taxes
------------------------
<2> IRC 105(h).
SB 594 - Ashburn Page 6
for both the employee and employer. <3>
Except for Federal Insurance Contributions Act (FICA)
withholding, California generally conforms to federal law
in this area.
Credits Generally
Existing state and federal laws provide various tax
credits designed to provide tax relief for taxpayers who
incur certain expenses (e.g., child adoption) or to
influence behavior, including business practices and
decisions (e.g., research credits or economic development
area hiring credits). These credits generally are designed
to provide incentives for taxpayers to perform various
actions or activities that they may not otherwise
undertake.
Under state law, for taxable years beginning on or
after January 1, 2008, and before January 1, 2010, the
total of all business credits otherwise allowable may not
exceed 50 percent of the net tax of the taxpayer for that
taxable year. Taxpayers with net business income of less
than $500,000 are excluded from this limitation.
In addition, current state Corporation Tax Law allows
the assignment of certain credits to taxpayers that are
members of a combined reporting group and adds the
following provisions:
o Provides that an "eligible credit" may be assigned
by a taxpayer to an "eligible assignee."
"Eligible credit" means any credit earned by a
taxpayer in a taxable year beginning on or
after July 1, 2008, or any credit earned in any
taxable year beginning before July 1, 2008,
which is eligible to be carried forward to the
taxpayer's first taxable year beginning on or
after July 1, 2008.
-------------------
<3> For federal purposes, under the Federal Insurance
Contributions Act (FICA), in addition to withholding for
personal income tax, wages are subject to withholding for
both social security (also known as OASDI for Old Age,
Survivors, and Disability Insurance) and Medicare. For
2007, the social security tax wage base limit is $97,500.
The employee tax rate is 6.2 percent, for a maximum
contribution of $6,045. The employee tax rate for Medicare
is 1.45 percent. There is no wage base limit for Medicare
tax. Employers are required to pay social security and
Medicare tax on wages paid in the same amount of the
employee contribution.
SB 594 - Ashburn Page 6
"Eligible assignee" means any "affiliated
corporation" that is a member of a combined
reporting group at certain specified times.
"Affiliated corporation" means a corporation
that is a member of a combined reporting group.
o Provides that the election to assign any credit is
irrevocable once made and is required to be made on
the taxpayer's original return for the taxable year in
which the assignment is made.
THIS BILL
Establishes a credit against income or franchise tax
in the amount of 15 percent of administrative costs
incurred by a qualified taxpayer in connection with
establishing or administering a cafeteria plan that
provides for the payment of health insurance premiums of
the taxpayer's employees.
Defines the term "qualified taxpayer" as an employer,
meaning any individual or entity that is doing business in
California, that is deriving income from California sources
or is subject to the laws of California. The term
"employer" would also mean the State of California and all
of its political subdivisions, Regents of the University of
California, any other political body or agency of the
state, and any person, officer, employee, department, or
agency paying wages to employees for services performed
within California.
Denies a deduction for any portion of expenses for
which the credit is allowed and would not allow this credit
SB 594 - Ashburn Page 6
for expenses for which any other credit under the personal
income tax or corporation tax law was allowed. The bill
would also allow any unused credit to be carried over for
seven years.
Requires the FTB to provide a report on the
utilization of the credit to the Legislature. The report
would be required to be submitted on or before January 1,
2013, and must provide information regarding the
effectiveness of the credit, including the amount of the
credit claimed, an estimate of the number of IRC Section
125 cafeteria plans established, and the number of
employees affected, and information regarding the types of
benefits offered by these plans.
The credit provided by this bill would be subject to
the 50 percent limitation for the 2009 taxable year and
could be assigned to other members of a combined reporting
group.
The bill would repeal the credit on December 1, 2014.
.FISCAL EFFECT:
FTB estimates the following revenue associated with this
bill:
------------------------------------
| |
| |
|------------------------------------|
| Effective for Taxable Years BOA |
| 1/1/09 |
| |
|------------------------------------|
| [$ In Millions] |
SB 594 - Ashburn Page 6
| |
------------------------------------
-----------------------------------
| 2009-2010 | 2010-2011 | 2011-2012 |
| | | |
|-----------+-----------+-----------|
| -$60 | -$100 |-$120 |
| | | |
-----------------------------------
COMMENTS:
A. Purpose of the Bill
According to the Author:
The purpose of this bill is to create an economic
incentive for employers to offer cafeteria plans for their
employees to purchase healthcare benefits. The IRS has
established Section 125 of the Internal Revenue Code to
allow companies to give their employees the opportunity to
pay for benefits on a pretax basis.
SB 594 will authorize a 15% tax credit for
administrative costs associated with establishing or
managing a qualified cafeteria plan. This legislation will
encourage employers to offer insurance options to employees
while also making health insurance more affordable for
residents by allowing insurance premiums to be deducted
pre-tax.
Current law imposes personal income taxes on
individuals and corporate income taxes on business in
California. Various tax credits have been established in
order to provide relief and encourage desired behaviors.
This bill will provide tax relief for business who offer
employees healthcare options and facilitate the maintenance
of such insurance programs. Employees benefit from the
ability to pay for insurance plans on a pretax basis. Such
pretax payments are permitted by the existing Internal
Revenue Code which establishes eligibility for specific
cafeteria plans.
SB 594 seeks to provide Californians with the
SB 594 - Ashburn Page 6
opportunity to acquire health insurance. Individuals whose
jobs do not offer health benefits must absorb the entire
cost of health insurance from their net income, creating a
financial hardship and disincentive to purchase health
insurance. This results in lower participation in
preventative care and encourages the utilization of costly
emergency room visits in order to provide for medical
needs. Allowing employees to deduct healthcare premiums
pre-tax makes healthcare more affordable and increases the
likelihood that these workers will carry health insurance.
The reality is that the more people that are insured, the
lower the costs to the taxpayers. This is commonsense
legislation that addresses a need of Californians while
also benefiting the healthcare system.
B. State has a variety of tax credits
These credits generally are designed to provide
incentives for taxpayers to perform various actions or
activities that they may not otherwise undertake. Credits
are also a way of providing a kind of government subsidy in
support of a desired action. It is not clear as to why the
state should provide tax credits and deductions to support
cafeteria plans as opposed to direct subsidies for health
insurance.
C. Not clear if credit will provide adequate incentive to
businesses Because they use pre-tax money, cafeteria plans
can save employees and employers significant sums of money,
most of which would have been paid to the federal
government as taxes and a lesser amount to the state.
Anecdotal evidence suggests that cafeteria plans are not
very expensive to administer. Yet small businesses do not
take advantage of the significant benefits. The reasons
for this lack of participation are not clear. Given that
the benefits of establishing the plans are significant and
the costs minimal, it is unclear how much of an incentive
an additional tax credit will provide.
SB 594 - Ashburn Page 6
D. Unclear what activities and expenses would be
allowable for obtaining the credit.
The bill states that the credit shall be: "?an amount
equal to 15 percent of the amount of administrative costs
incurred by a qualified taxpayer in connection with
establishing a cafeteria plan that provides health benefits
to the taxpayer's employees." The use of the word
"establishing" suggests that it is the administrative costs
of establishing, meaning setting up new plans, rather than
the ongoing administrative costs of maintaining the plans
that are eligible for the credit.
E. Bill should have sunset date for credit and an FTB
evaluation.
Given that the impact and cost of the credit proposed
by this bill are unknown, staff recommends that the bill be
amended to include a sunset date and require FTB to
evaluate the credit. A sunset date gives the Legislature
the opportunity to reevaluate the credit. Many state
income tax credits operate under a sunset. The report from
FTB would help provide information that will be important
in deciding about whether or not to extend the sunset. FTB
should report regarding the effectiveness of this credit,
including the dollar amount of the credit, the number of
125 plans established, the number of employees affected,
and the types of benefits being offered by these plans.
Suggested amendments
(f) This section shall remain in effect only until January
1, 2012, and as of that date is repealed.
(g) On or before January 1, 2011, the Franchise Tax Board
shall provide a report on the utilization of the tax credit
described in this section to the chairs and vice chairs of
the Assembly Committee on Health, the Assembly Committee on
Revenue and Taxation, the Senate Committee on Health, and
SB 594 - Ashburn Page 6
the Senate Committee on Revenue and Taxation. The report
shall include information regarding the effectiveness of
this credit, including the amount of the credit claim, an
estimate of the number of 125 plans established and the
number of employees affected and information regarding the
types of benefits being offered by these plans
F. Prior legislation
SB 820 (Ashburn, 2007) was almost identical to this bill.
Held in Senate Health Committee.
SB 1584 (Runner, 2006) would have allowed the same
deductions on California personal income tax returns as
allowed on the federal for health savings accounts.
Held in Senate Health Committee.
SB 1639 (Dutton, 2006) would have provided a tax credit for
certain employers providing health insurance to employees.
Held in Senate Revenue and Taxation Committee.
SB 1787 (Ackerman, 2006) would have allowed the same
deductions on California personal income tax returns as
allowed on the federal for health savings accounts.
Held in Senate Revenue and Taxation Committee.
AB 2010 (Plescia, 2006) would have allowed the same
deductions on California personal income tax returns as
allowed on the federal for health savings accounts. Held
in Assembly Revenue and Taxation Committee
SB 173 (Maldonado, 2005) would have allowed the same
deductions on California personal income tax returns as
allowed on the federal for health savings accounts.
Held in Senate Revenue and Taxation Committee
AB 115 (Klehs, Chapter 691, Statutes of 2005) would have
allowed the same deductions on California personal income
SB 594 - Ashburn Page 6
tax returns as allowed on the federal for health savings
accounts. These provisions were deleted from the bill
prior to enactment.
Support and Opposition
Support: California Medical Association
Oppose: California School Employees Association,
AFL-CIO
California Professional Firefighters
Association
---------------------------------
Consultant: Gayle Miller