BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 36 HEARING: 3/16/11
AUTHOR: Perea FISCAL: Yes
VERSION: 2/18/11 TAX LEVY: Yes
CONSULTANT: Faulkner
FEDERAL HEALTH CARE CONFORMITY
Conforms to federal law that allows an income exclusion or
deduction from gross income for children under 27 years
old.
Background and Existing Law
President Obama's health care reform legislation, the
Patient Protection and Affordable Care Act (H.R. 3590), was
enacted March 23, 2010 and amended by the Health Care and
Education Reconciliation Act of 2010 (H.R. 4872) enacted
March 30, 2010. According to White House press documents,
the legislation was the vehicle to make health care more
affordable, health insurers more accountable, expand health
coverage to all Americans, and sustain the health system,
thereby stabilizing family budgets, the Federal budget, and
the economy. The legislation was partially effective in
2010 and implementation continues beyond 2014.
In 2010, group health plans and health insurance issuers
that offer group or individual health insurance coverage,
and that provide dependent coverage of children, are
required to continue to make such coverage available for an
adult child (who is not married) until the child turns 26
years of age. The extended coverage must be provided no
later than September 23, 2010. In conjunction with this
requirement, the federal legislation also gives favorable
tax treatment to coverage for adult children.
Specifically, IRC section 105(b) extends the general
exclusion for reimbursements for medical care expenses
under an employer-provided accident or health plan to any
child of an employee under age 27. The new federal law
also intended to apply to the exclusion of
employer-provided coverage under an accident or health plan
for injuries or sickness for such a child. (See Comment
3)
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Federal law generally provides that employees do not pay
taxes on the value of employer-provided health coverage
under an accident or health plan (IRC section 106). This
exclusion applies to coverage for personal injuries or
sickness for employees (including retirees), their spouses
and their dependents. In addition, any reimbursements under
an accident or health plan for medical care expenses for
employees (including retirees), their spouses and their
dependents under age 27, are generally excluded from gross
income (IRC section 105(b)). Federal law defines
"dependent" as a qualifying child or a qualifying relative.
The Voluntary Employees' Beneficiary Associations (VEBA)
and qualified retiree health plan/401(h) accounts were also
changed to reflect the new age requirement. Self-employed
individuals are allowed a deduction for reimbursements for
medical care expenses for a child under 27.
Coverage and reimbursements under an employer-provided
accident and health plan for employees generally and their
dependents, including children under age 27, are excluded
from wages for Federal Insurance Contributions Act (FICA)
and Federal Unemployment Tax Act (FUTA) tax purposes.
Proposed Law
This bill conforms to the federal changes in the law for
dependents under age 27. Specifically, this bill conforms
to the federal age requirement for employer-provided health
coverage and reimbursements for medical care expenses under
an employer-provided accident or health plan, deductible
self-employed medical insurance costs, and VEBAs. AB 36
also conforms to the federal change under the unemployment
insurance law. The California exclusions apply in the same
manner and to the same periods as the exclusion applies for
federal purposes to payments made on or after March 30,
2010. For purposes of a qualified retiree health plan,
California automatically conforms to the new federal
provisions.
State Revenue Impact
The Franchise Tax Board (FTB) estimates this bill will
result in revenue losses of $4.8 million in fiscal year
(FY) 2010-11, $38 million in FY 2011-12, $35 million in FY
AB 36 -- 2/18/11 -- Page 3
2012-13, $40 million in FY 2013-14, and $44 million in FY
2014-15. (See Comment 5)
Comments
1. Purpose of the Bill 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. Conformity. California does not automatically conform
to changes in federal law. 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. State tax law did not conform to
changes made in federal law after 2005 until last year,
when the Legislature enacted a bill conforming to changes
through January 1, 2009 (SB 401, Wolk). Conformity is
difficult despite its advantages and reduced tax compliance
costs, because the state may disagree with Congress's tax
policy changes, and conforming can also significantly
impact state revenues.
AB 1178 (Portantino) was introduced in the 2009/2010
session and contained numerous federal health care
conformity provisions, including similar provisions of AB
36. AB 1178 was held in Senate Appropriations. SB 1088
(Price), Chapter 660, Statutes of 2010, conformed to
federal changes requiring specified group plans that
provide dependent coverage to provide health care coverage
for a dependent child up to the age of 26. SB 1088 only
addressed the health code changes, not any of the tax
AB 36 -- 2/18/11 -- Page 4
provisions.
3. IRS Notice 2010-38. Prior to the health care reform
legislation, the exclusion for employer-provided coverage
under IRC section 106 paralleled the exclusion for
reimbursements under IRC section 105(b). However, the
legislation amended section 105(b) only. The IRS states in
Notice 2010-38 that Congress did not intend to provide a
broader exclusion in section 105(b) than in section 106.
Accordingly, the IRS and Treasury intend to amend the
regulations under section 106 retroactive to March 30,
2010.
4. Compliance Burden. An employer has the burden of
determining the amount to withhold from an individual's
wages. Because California has not conformed to the federal
health care tax provisions, the employer has the task of
dealing with different withholding requirements for federal
and state purposes. Currently, employers are individually
determining the fair market value of employer-provided
medical coverage for an adult child that exceeds the amount
an employee would otherwise pay for family coverage. The
task of reporting employee income has become more
complicated, time-consuming, and financially burdensome.
California has always conformed to health care exclusions.
Conformity eliminates confusion and simplifies the tax
process for employers, taxpayers and taxing authorities.
5. Estimated Revenue Loss . The current FTB estimate could
over or understate the revenue impact if the state taxes
these benefits. For example, the revenue estimate provided
by FTB for these provisions in AB 1178 was considerably
less; it was $92 million over a five year period compared
to the current estimate of $161.80 million over the same
period. The difference is attributed to better data
available now than in mid-2010. Since this benefit has
never been taxed, FTB notes in its methodology that it is
difficult to estimate. FTB only taxes a percentage of the
federal amounts. California has always conformed to health
care exclusions so there is no empirical data to derive a
more accurate revenue estimate.
Assembly Actions
AB 36 -- 2/18/11 -- Page 5
Assembly Revenue and Taxation 9-0
Assembly Appropriations 15-0
Assembly Floor 74-0
Support and Opposition (03/07/11)
Support : Association of California Life and Health
Insurance Companies; State Building and Construction Trade
Council; California State Association of Electrical
Workers; California Coalition of Utility Employees;
California State Pipe Trades Council; Western States
Council of Sheet Metal Workers; Elevator Constructors
Union; Kern County Board of Supervisors; California
Hospital Association; California School Employees
Association AFL-CIO; California Labor Federation; Livermore
Valley Joint Unified School District; California
Association of Psychiatric Technicians; California State
Employees Association; California Medical Association;
California Association of School Business Officials;
National Federation of Independent Business; Placer County
Board of Supervisors; Merced County Board of Supervisors;
Butte County Board of Supervisors; California Taxpayers
Association; Spidell Publishing, Inc.; Professional
Engineers in California Government; California Association
of Professional Scientists; California Association of
Health Plans; Simi Valley Chamber of Commerce; The
California Chamber of Commerce; American Federation of
State, County, and Municipal Employees (AFSCME), AFL-CIO;
The California Association of Joint Powers Authorities.
Opposition : Unknown.