BILL ANALYSIS �
AB 558
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Date of Hearing: May 27, 2011
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 558 (Portantino) - As Amended: May 18, 2011
Policy Committee: Revenue and
Taxation Vote: 8-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill temporarily waives the 2.5% penalty otherwise imposed
on early distributions from specified retirement savings plans,
provided that the distributions are received by individuals who
have exhausted their unemployment benefits. Specifically, this
bill:
1)Provides that the 2.5% penalty does not apply to an early
distribution from a qualified pension, profit-sharing, or
stock bonus plan, within the meaning of Internal Revenue Code
(IRC) Section 401(k), a qualified annuity plan under IRC
Section 403(a), a tax-sheltered annuity under IRC Section
403(b), an eligible deferred compensation plan under IRC
Section 457, and IRA under IRC Section 408, if received by an
individual who has either exhausted his/her unemployment
benefits or is ineligible for unemployment benefits.
2)Limits the amount of qualifying distribution to $25,000 per
taxable year.
3)Applies to distributions made in taxable years beginning on or
after January 1, 2011, and before January 1, 2013.
4)Takes effect immediately as a tax levy.
FISCAL EFFECT
This bill will result in an estimated annual loss to the General
Fund (GF) of $36 million in fiscal year (FY) 2011-12 and $9
million in FY 2012-13.
AB 558
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COMMENTS
1)Purpose. The author states that as more Californians exhaust
their unemployment benefits, many turn to savings and
retirement accounts to make ends meet. While in a difficult
financial situation, the state charges these individuals a
2.5% early withdrawal penalty to access their retirement funds
before they have officially retired. The author notes this
bill would create an exemption to this penalty to make life a
little less difficult for individuals who have been unemployed
for almost two years. The exempted funds are limited to the
first $25,000 withdrawn, which is about the maximum annual
amount an individual would receive in unemployment payments.
2)Background . Many Californians are struggling to find work. As
of May 3, 2011, over 409,000 individuals in the state have
exhausted their full 99-week unemployment insurance benefits.
The federal legislation enacted on December 17, 2010, was of
no help to them as it did not include additional weeks of
extended benefits. Many of those unemployed individuals have
to rely on savings, credit cards and various social services
programs to pay for basic necessities. An important savings
vehicle utilized by many workers is retirement plans such as
401(k) plan or IRAs. However, those who have saved for
retirement are unable to access their retirement funds without
paying the heavy penalty under both federal and state tax
laws.
3)Federal penalties . It is unclear how many individuals would
decide to take advantage of the exception created by AB 558,
given that they will still be subject to the 10% federal
penalty, in addition to the regular federal and state income
taxes.
4)There is no registered opposition to this bill.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081