BILL ANALYSIS �
AB 36
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Date of Hearing: February 14, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 36 (Perea) - As Amended: January 27, 2011
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Personal income tax: adult child dependent health
care benefits: exclusion or deduction.
SUMMARY : Conforms to federal tax law that excludes from gross
income of a parent the medical care expenses incurred for, and
health care benefits provided by the parent's employer to, an
adult child. Specifically, this bill :
1)Excludes from the employee's gross income the value of
employer-provided health coverage, under an accident or health
plan, for the employee's child who, as of the end of the
taxable year, has not attained age 27.
2)Allows a parent to exclude from his/her gross income any
reimbursements, under a flexible spending arrangement, for
medical expenses incurred by the parent for the medical care
of his/her child who, as of the end of the taxable year, has
not attained the age of 27.
3)Allows self-employed individuals to deduct the cost of health
insurance provided for an adult child through the end of the
taxable year in which the child turns 26.
4)Allows a member of a nonprofit voluntary employees'
beneficiary association that provides health benefits to an
adult child, through the end of the taxable year in which the
child turns 26, to exclude the benefit from the member's gross
income.
5)Applies to expenses incurred and benefits provided on or after
March 30, 2010.
6)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW:
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Under federal law, health benefits for an adult child dependent
under an accident or health plan, is tax free to the employee.
Internal Revenue Code (IRC) Section 152 defines a dependent as a
qualifying child (under the age of 19 or 24 if he/she is a full
time student). The qualifying child definition was expanded in
March of 2010 under IRC Section 105(b) to include an adult child
through the end of the taxable year the child turns 26 solely
for health benefit deduction purposes. This expanded health
care tax benefit applies to employed individuals, self-employed
individuals, members of voluntary employees' beneficiary
associations, and qualified plans providing retiree health
benefits, for an employee's adult child dependent who, by the
end of the taxable year, has not reached 27 years of age.
EXISTING STATE LAW:
Currently, an employee may provide health care coverage for a
child up to the age of 26. This coverage was expanded by SB
1088 (Price), Chapter 660, Statutes of 2010, to conform to
federal changes in health care law. SB 1088, however, did not
address the issue of how the benefit would be treated for tax
purposes.
For health care benefit tax purposes, California law conforms to
the definition of a qualifying child under IRC Section 152. To
qualify for an excludable or deductible benefit, a qualified
child must satisfy five tests for the taxable year:
1)The child has the same principal place of abode as the
taxpayer for more than one-half of the taxable year;
2)The child is the taxpayer's son, daughter, stepson,
stepdaughter, brother, sister, stepbrother, stepsister, or a
descendant of any such individual;
3)The child has not yet attained the age of 19 by the close of
the taxable year (or, if a full-time student, has not attained
the age of 24 by the close of the taxable year);
4)The child has not provided over one-half of their own support
for the calendar year in which the taxable year of the
taxpayer begins; and
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5)The qualifying child has not filed a joint return (other than
for a claim of refund) with their spouse for the taxable year
beginning in the calendar year in which the taxable year of
the taxpayer begins. A tie-breaking rule applies if more than
one taxpayer claims a child as a qualifying child, and there
is no age limit with respect to individuals who are totally
and permanently disabled at any time during the calendar year.
FISCAL EFFECT : The Franchise Tax Board (FTB) staff estimates
that this bill will result in a revenue loss of $4.8 million in
fiscal year (FY) 2010-11, $38 million in FY 2011-2012, $35
million in FY 2012-13, $40 million in FY 2013-14, and $44
million in 2014-15.
COMMENTS :
1)Author's Statement. The author states, "With an estimated 1.2
million young adults between the ages of 19-25 uninsured, many
young adults find themselves without medical coverage. By
conforming California's tax laws to federal standards, the
state creates an affordable health insurance option for the
large pool of uninsured young adults in California. Although
SB 1088 allows parents to add their adult child to their
health care plan, the cost of non-conformity may become a tax
burden some families may not be able to afford. By conforming
California's tax laws to federal standards, the state ensures
many more young adults are insured and their parents are not
burdened by additional taxes as a result."
2)Arguments in Support. Proponents state that the added
administrative and financial burden on employers in attempting
to calculate the taxable amount attributable to the adult
child would be eliminated with the passage of AB 36.
Proponents also point out the additional tax burden that
parents will face, along with the potential added cost of
adding an adult child to their health plan, may become a
disincentive for parents to add an adult child to their health
care plan.
3)Committee staff notes the following:
a) Background. President Obama's sweeping health care
reform legislation, the Patient Protection and Affordable
Care Act (H.R. 3590), was enacted March 23, 2010 and
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amended by the Health Care and Education Reconciliation Act
of 2010 (H.R. 4872) enacted March 30, 2010. The White
House believes this legislation will make health care more
affordable, make health insurers more accountable, expand
health coverage to all Americans, and make the health
system sustainable, stabilizing family budgets, the Federal
budget, and the economy. Implementation of this
legislation started in 2010 and continues through 2014 and
beyond.
This bill is not a health care reform bill. This bill is a
tax conformity bill that makes the mandated implementation
of health care reform an easier transition. When changes
are made to the federal income tax law, California does not
automatically adopt such provisions. Instead, state
legislation is needed to conform to most of those changes.
Conformity legislation is introduced either as individual
tax bills to conform to specific federal changes or as one
omnibus bill to conform to the federal law as of a certain
date with specified exceptions.
b) Estimated Revenue Loss. Although this bill is estimated
to result in a loss to the general fund, the estimate may
not be entirely accurate, and does not reflect what would
be collected if AB 36 does not pass. Currently, there is
no method set for determining the amount of the benefit to
tax. Also, this benefit has never been taxed in the past,
so passage of AB 36 would not result in a revenue loss to
the General Fund. In fact, if AB 36 is not enacted, any
amount collected would result in a windfall to the state.
Estimating the amount of the windfall is difficult, given
there is no set method all employers must follow.
Therefore, the current FTB estimate could over or
understate what would be collected if the benefit is taxed.
c) Employer Tax Compliance Burden. Because California has
not conformed to the federal adult child health care
benefit tax provision, an employer has the burden of
determining how much to withhold from an individual who
takes advantage of the benefit. Many employers first
realized the difference in federal and state income
treatment when preparing W-2's for 2010. As more parents
add their adult children to their health insurance, more
employers will face this administrative burden. In
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addition, the employer not only has the task of dealing
with different withholding requirements between the federal
and state levels, it also lacks guidance in determining the
proper withholding amount. This benefit has never been
taxed before and, therefore, there is no statutory guidance
available to date.
d) Additional Tax Liability on Parents. The additional tax
liability parents could face as a result of non-conformity
could total a substantial amount, depending on the method
used to calculate tax liability. As stated above, this tax
has not been previously collected, so determining the
financial burden on the participating parents is difficult
to estimate. The tax liability could amount to upwards of
hundreds of dollars per year. This added financial strain
could dissuade parents from providing health care to their
uninsured adult children.
It merits pointing out that the potential tax liability
will be different for each parent. Although there is no
statutory guideline mandating the method for determination
of the amount taxable, there is a method suggested by both
FTB and California's Employment Development Department.
The calculation used is the difference between the cost of
the premium before the addition of the adult child and the
cost after the addition. The issue with the utilization of
this method is that some parents will see no additional tax
liability and other parents will be taxed hundreds of
dollars yearly, depending on the number of dependents on
the health plan. This is because the addition of a
dependent does not always result in an increase in
insurance premium.
For example, some health care premiums charge the same
amount whether there are two or three dependents on the
health care plan. So a parent with two dependents who adds
an adult child will see no tax liability, whereas a parent
who has one dependent will see a premium increase of $1,300
yearly if there is an addition of an adult child. The
resulting disparity is inequitable and will cause employers
to calculate tax liability on an employee by employee
basis, a task that, needless to say, will result in
additional time and expense for employers.
e) Young Adult Benefit. According to the Federal
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Department of Health and Human Services, young adults have
the highest rate of uninsured of any age group. About 30%
of young adults are uninsured, representing more than one
in five of the uninsured. This rate is higher than any
other age group, and is three times higher than the
uninsured rate among children. Young adults have the lowest
rate of access to employer-based insurance. Also, contrary
to the myth that young people do not need health insurance,
one in six young adults has a chronic illness like cancer,
diabetes or asthma. Nearly half of uninsured young adults
report problems paying medical bills.
4)Related Legislation.
SB 1088 (Price), Chapter 660, Statutes of 2010. This bill
extended the age which parents could add their adult child to
their health care plan to 26 years of age. This bill did not
affect tax treatment of this benefit.
AB 1178, introduced in the 2009-10 Legislative Session, had a
similar provision to this bill. AB 1178 was held in the Senate
Appropriations Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
AFSCME
Aaron Read & Associates, LLC
Butte County Board of Supervisors
California Association of Health Plans
California Association of Psychiatric Technicians
California Chamber of Commerce
California Hospital Association
California Labor Federation
California School Employees Association
Cal-Tax
Livermore Valley Joint Unified School District
Merced County Board of Supervisors
Spidell Publishing Inc.
Opposition
None on file
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Analysis Prepared by : Myriam Bouaziz/Oksana Jaffe / REV. & TAX.
/ (916) 319-2098