BILL ANALYSIS �
AB 36
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ASSEMBLY THIRD READING
AB 36 (Perea and Blumenfield)
As Amended February 18, 2011
Majority vote
REVENUE & TAXATION 9-0 APPROPRIATIONS 15-0
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|Ayes:|Perea, Donnelly, Beall, |Ayes:|Fuentes, Harkey, |
| |Charles Calderon, | |Blumenfield, Bradford, |
| |Cedillo, Fuentes, Gordon, | |Charles Calderon, Campos, |
| |Harkey, Nestande | |Davis, Gatto, Hall, Hill, |
| | | |Lara, Mitchell, Norby, |
| | | |Solorio, Wagner |
| | | | |
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SUMMARY : Conforms to federal tax law that excludes from the
gross income of a parent the value of health care benefits and
reimbursements for medical care provided by the parent's
employer to an adult child 26 years or younger. 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 adult child who, as of the end of the
taxable year, has not attained the age of 27.
2)Excludes from the employee's gross income any reimbursements
made under an employer-provided accident or health plan for
medical expenses for the employee's 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.
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6)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW :
Under federal law, the value of employer-provided health
coverage under an accident or health plan is excluded from an
employee's gross income, if provided to the employee, for his or
her spouse, dependent or child who, as of the end of the taxable
year, has not attained age 27 ("adult child"). The exclusion
also applies to reimbursements for medical care expenses for an
employee's adult child. Federal law also authorizes a similar
exclusion for health benefits provided to the adult children of
retired employees under qualified retiree health pension plans
(Internal Revenue Code (IRC) Section 401(h)) and members of
voluntary employees' beneficiary associations (IRC Section
501(c)).
EXISTING STATE LAW :
California, in conformity with the recently-enacted federal
health care acts, requires group health plans and health
insurance issuers to provide health care coverage for adult
children up to the age of 26, beginning on or after September
23, 2010, except under specified circumstances (SB 1088 (Price),
Chapter 660, Statutes of 2010). However, California does not
conform to the federal change that excludes from tax the value
of health care benefits provided by an employer to the
employee's adult children under the age of 26.
For health care benefit tax purposes, California law conforms to
the definition of a qualifying child under IRC Section 152.
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 : Author's Statement. The author states, "With an
estimated 1.2 million young adults between the ages of 19-25
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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. AB
36 ensures many more young adults are insured and their parents
are not burdened by additional taxes as a result."
Committee comments:
1)Background. Congress amended the IRC to give certain
favorable tax treatment for coverage for adult children.
Specifically, IRC Section 105(b) was amended to extend the
general exclusion from gross income for reimbursements for
medical care under an employer-provided accident or health
plan to any employee's child who has not attained age 27 as of
the end of the taxable year. Similar amendments were also made
to IRC Section 401(h) for retiree health accounts in pension
plans, IRC Section 501(c)(9) for voluntary employees'
beneficiary associations (VEBAs), and to IRC Section 162(l)
for deductions by self-employed individuals for medical care
insurance.
Furthermore, on April 27, 2010, the Internal Revenue Service
(IRS) issued Notice 2010-38, in which it stated that the
regulations under IRC Section 106 would be amended
retroactively to March 30, 2010, to provide that coverage for
an employee's child under age 27 is excluded from the
employee's gross income. Most health benefits are provided to
employees as health plan coverage through IRC Section 106,
which expressly excludes from an employee's gross income
coverage under an employer-provided accident or health plan.
However, the recent amendment to the federal tax law only
provided for an exclusion for employer reimbursements for
medical care expenses (IRC Section 105(b)), and not
employer-provided coverage. Prior to the enactment of recent
health care acts, the exclusion for employer-provided health
coverage under Section 106 had paralleled the exclusion for
reimbursements for medical care under IRC Section 105(b). In
issuing Notice 2010-38, the IRS re-affirmed that the
exclusions under Sections 105 and 106 had always been parallel
and concluded that there was no indication that Congress
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intended to provide a broader exclusion for reimbursements
than for health plan coverage. Thus, on and after March 30,
2010, both coverage under an employer-provided accident or
health plan and amounts paid or reimbursed under such a plan
for medical care expenses of an employee's child who has not
attained age 27 as of the end of the employee's taxable year
are excluded from the employee's gross income under federal
law.
California adopts a broad range of IRS published guidance,
though excludes letter rulings (FTB Letter 2010-5). Under
Revenue and Taxation Code (R&TC) Section 17131, California
conforms to IRC Section 106, as of the "specified date" of
January 1, 2009. Thus, if this bill is enacted into law, IRS
Notice 2010-38 would apply for California tax purposes as a
regulation under the California Personal Income Tax Law (R&TC
Section 17024.5(d)).
2)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's wages who takes advantage of
the benefit. Many employers first realized the difference in
federal and state income treatment when preparing W-2s for
2010. As more parents add their adult children to their
health insurance, more employers will face this administrative
burden. In 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.
3)Additional Tax Liability on Parents. Parents could pay more
taxes as a result of non-conformity, 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.
4)Estimated Revenue Loss. Although this bill is estimated to
result in a loss, the estimate may not be entirely accurate.
Currently, there is no method set for determining the amount
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of the benefit to tax. Also, since this benefit has never
been taxed in the past, passage of this bill would not result
in a revenue loss to the General Fund. In fact, if this bill
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 that employers must
follow. Therefore, the current FTB estimate could over or
understate what would be collected if the benefit is taxed.
5)Young Adult Benefit. According to the Federal 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.
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 (Portantino), introduced in the 2009-10 Legislative
Session, had a similar provision. AB 1178 was held in the
Senate Appropriations Committee.
Analysis Prepared by : Myriam Bouaziz/Oksana Jaffe / REV. & TAX.
/ (916) 319-2098
FN: 0000036
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